Thursday, September 11, 2008

Director Pay Rising Despite Falling CEO Pay: Study

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Director compensation at the biggest U.S. companies continued to rise in 2007, in contrast to chief executive pay, which dropped sharply last year amid a slowing economy and weakening corporate performance, a study found.

The study, released Wednesday by consulting firm Mercer, a unit of Marsh & McLennan Companies [MMC 32.31 0.17 (+0.53%) ], said direct pay for board members at 50 large U.S. companies increased 4.2 percent in 2007 to a median of $236,147.

In comparison, pay for CEOs at 50 top companies dropped 15.8 percent last year, Mercer said.

"The turbulent economy has apparently had little impact on director pay," the firm said.

The study analyzed proxy statements for 350 U.S. companies that were selected to provide an industry mix similar to Fortune 1000.

Executive and director compensation has received increased attention from shareholders amid the subprime mortgage meltdown and ensuing credit crisis. The topic has repeatedly been discussed on the U.S. presidential campaign trail, with Democrat Barack Obama and Republican John McCain taking aim at high-salaried CEOs.

Mercer said director pay has been climbing in recent years as board members have taken a more active role, reflecting the fallout from corporate scandals such as Enron and the ensuing regulatory changes.

"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," said Diane Doubleday, global leader of Mercer's executive compensation group, in a statement.

However, the size of increases in director pay in 2007 were generally smaller than prior years.

Among the top 50 U.S. companies—those with a 2007 median revenue of $66.2 billion—director pay increased 4.2 percent in 2007, compared to a 6 percent increase the prior year.

For companies with median revenue of $16.7 billion, director pay was 8.7 percent higher in 2007, about the same level of increase as the prior year.

For companies with median revenue of $3.2 billion, director pay increased 8.4 percent in 2007, compared to 11.4 percent a year earlier.

The mix of director pay is also shifting. Mercer found that annual retainers for board and committee service are continuing to replace meeting fees, reflecting a change to paying for the role instead of paying for performance.

"It is now expected that directors not only prepare for and attend meetings, but spend substantial time on company matters outside of scheduled meetings," Mercer said.

Further, there continued in 2007 to be a decline in the use of stock options as compensation. Other equity vehicles that encourage more of an ownership stake, such as restricted stock, are being used, the study said.

For Top 50 companies, stock options accounted for only 9 percent of the annual equity compensation mix, down from 13 percent in 2006.

The study also found that industries with the highest paid directors also had the highest percentage of total direct compensation in equity. The top-paying industries—financials, energy and health care—had 68/32, 62/38, and 60/40 ratios of equity to cash, respectively.

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