Study Pinpoints Trends in Director Composition and Compensation
WASHINGTON, D.C. – Companies continue to implement features in the board structures and pay programs that are commonly associated with good corporate governance, shows IRRC’s newest study, Board Practices/Board Pay 2001: the Structure and Compensation of Boards of Directors at S&P 1,500 Companies.
Areas of significant advancement include rising director independence, particularly in the proportion of companies with a majority of independent directors, and in the overall composition of audit committees. The number of companies that have an employee on the compensation committee also continues to decline, although some boards continue to allow an executive—even the CEO in a few cases—to serve on this critical committee. Also of concern, after years of gradual director diversification, it appears that the spread of women and minority directors to more boards has come to a halt.
On the compensation side, annual cash amounts paid to directors continue to increase. Supplemental stock-based grants are used by a substantial majority of companies in addition to base pay—81 percent of the S&P 1,500 companies analyzed in the study grant their directors supplemental stock options or share awards, or both, and most companies make grants every year.
Options dominate among Technology and Health Care companies, while Utilities still favor share awards. The approximate grant-date value of an annual option award averaged $65,240 this year among all the companies studied, versus $34,330 for the average annual supplemental stock award. The average base pay for S&P 1,500 company directors totaled $35,153. Retainers averaged $28,292 in cash; total board meeting attendance fees averaged $10,482 in cash.
IRRC’s study highlights the following corporate governance and compensation developments:
- The trend toward increased independence on boards goes on, rising another two percentage points this year. Compensation committees continue to post high levels of independence, but the biggest jump occurred on audit committees, which rocketed to 90 percent average independence overall this year. Also, 70 percent of the companies surveyed had completely independent audit committees, increasing from just 51 percent three years ago.
- Most boards have stabilized in size, but Technology boards actually got smaller in 2001.
- Women and minorities are more likely than directors overall to be independent from the company where they sit on the board. Eighty-six percent of directorships held by women and 82 percent held by minority directors are classified as independent, compared with 66 percent generally.
- Annual retainers among S&P 1,500 companies grew by 7 percent this year, to $28,292 while the median level rose more than 10 percent. Interestingly, the biggest jumped in retainer levels occurred in the beleaguered Communications Services sector, where the average retainer rose 14 percent to $41,818, and the median level soared almost 17 percent to $35,000.
- Slightly more than 10 percent of companies have disclosed stock ownership guidelines for directors.
- The average value of one-time stock option grants is typically about three times that of annual option awards.
- About a fifth of companies give directors an opportunity to take stock in lieu of cash annual pay—and 30 percent of those companies provide directors with an incentive to do so.
About the study
Board Practices/Board Pay 2001 provides an analysis of the latest structure and board compensation practices of nearly 1,200 U.S companies, and examines a total of 11,393 directors, making it the most comprehensive analytical and comparative tool available. The study analyzes the governance features and board compensation amounts that were reported in proxy statements for companies that held annual meetings between Jan. 1, 2001 and July 31, 2001. The analysis covers the governance practices and compensation packages of each company and pinpoints benchmarks based on three S&P indices, 10 revenue bands and 11 economic sectors.
IRRC, for over 25 years, has been the pre-eminent source of high quality, impartial information on corporate governance and social responsibility issues affecting investors and corporations worldwide. Today, IRRC provides research, software products and consulting services to nearly 500 subscribers and clients representing institutional investors, corporations, law firms and other organizations.