Ann Egan

In the face of a slowing US economy and weakening corporate performance, corporate director pay has continued to increase, according to a study released by Mercer and based upon recent proxy filings.<br />
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The turbulent economy has apparently had little impact on director pay. This result contrasts with the effect of the downturn on CEO compensation shown in a Mercer study released in May. CEOs in Mercer's Top 50 companies saw their total direct compensation plummet 15.8 percent from the prior year. In recent years, director pay began climbing as responsibilities and risks of personal liability increased following corporate scandals, regulatory changes and beefed-up shareholder scrutiny.<br />
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The study found that in Mercer's Top 50 companies median total direct compensation (pay for board and committee service, and equity grants) for board members increased 4.2 percent in 2007 to $236,147 compared to 6.0 percent the prior year. For Mercer's Large 150 companies, median board pay totaled $202,110, an increase of 8.7 percent, essentially the same increase experienced one year earlier. In Mercer's Mid 150 companies, total board pay increased 8.4 percent to $159,240 for 2007, compared to 11.4 percent a year earlier.<br />
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"Director pay has increased each year to reflect the growing demands and risks of serving as a steward in today's complex business and governance environment, observed Diane Doubleday, global leader of Mercer's executive remuneration services. "As stewards, directors are paid for their oversight of the company's strategic direction, not for execution of the business plan which is management's job. Consequently, the value of their compensation tends to be largely in the form of fixed retainers and fixed value equity awards.<br />
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More noteworthy is how the elements of director compensation have shifted. In the last two years, annual retainers for board and committee service have replaced in many cases the use of board and committee meeting fees, which have both declined in prevalence. Among Mercer's Top 50 companies, board meeting fees have fallen from 42 percent in 2005 to 36 percent in 2007. A similar decline has been experienced at the committee level, where prevalence of per-meeting fees has declined from the 44-46% range in 2005 to the 40-42% range in 2007 (exact percentages vary by committee). This reflects a governance shift from paying to ensure attendance to paying for the role. It is now expected that directors not only prepare for and attend meetings, but spend substantial time on company matters outside of scheduled meetings.<br />
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Audit and compensation committee chairs are the most affected by increased demands on directors and their pay reflects it. Mercer's study found that among the companies that reported pay levels for the position, 83 percent pay the audit committee chair a premium over what they pay other committee chairs. Approximately 70 percent of the compensation committee chairs receive a premium.<br />
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"Chairs do a lot of work outside of committee meetings and bear the brunt of the burden of ensuring the committee is carrying out its duties effectively, Ms. Doubleday said. "The premium pay is a way for boards to recognize that extra effort.<br />
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<strong>Shift from options to equity stakes</strong><br />
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Another shift which continued in 2007 has been the decline in the use of stock options in favor of other equity vehicles, usually in the form of restricted stock. For Top 50 companies, stock options accounted for only 9 percent of the annual equity compensation mix, down from 13 percent in 2006. A similar decline has happened at Mercer's Large 150 companies, where stock option use has fallen from 30 percent in 2005 to 25 percent in 2006 and further still to 20 percent in 2007. For Mid 150 companies, option use accounted for 46 percent in 2005, 37 percent in 2006, and 32 percent in 2007.<br />
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Ms. Doubleday explained the shift: "Given the role of directors, many companies see ownership, or having a stake in the company's shareholder value, as more appropriate than a 'leveraged' award for increasing stock price.<br />
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As in previous years, Mercer's director compensation study found some sharp industry differences. Interestingly, within each of Mercer's three research groups, the industries with the highest paid directors also had the highest percentage of total direct compensation in equity. For example, Top 50 companies averaged a 58/42 mix of equity to cash; however, the top-paying industries - financials, energy and health care - had 68/32, 62/38, and 60/40 ratios, respectively.<br />
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Mercer's research database of 350 companies consists of three datasets - Top 50 with revenue of $40 billion or more, Large 150 with revenue of $7.4 billion or more, and Mid 150 with revenue of $1.2 billion or more. (Large and Mid groups reflect the industry mix of the Fortune 1000.) These categories support Mercer's position that companies should compare themselves - when reading reports during the proxy season - to like-size organizations.<br />
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