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For Compensation and Audit Committees, Higher Differential Pay Becomes Norm

Stephen Miller  3/31/2008

Compensation for those serving on corporate boards of directors continues to move away from board meeting fees and toward larger retainers. In particular, higher compensation for board committee chairs and other board leadership positions has become commonplace, according to the National Association of Corporate Directors (NACD) Director Compensation Survey: 2007-2008.

Aside from the board chairs, outside directors sitting on audit committees or on compensation committees lead with the highest pay for their board services in 2007. Among the top 200 U.S. industrial and service companies by revenue:

• Median pay for audit committee members was $10,000 above their board member compensation.

• Median pay for compensation committee members
was an extra $5,500.

Chairs of both committees were paid significantly more:

• Median audit chair pay was $25,000 above board member compensation.

• Median compensation chair pay
was an extra $15,500.

"Directors with strong risk management backgrounds are hard to find, and audit committee chairs are spending an enormous amount of time on committee work, even more so now with the current credit and liquidity crisis and volatility in the economy,” according to Ken Daly, CEO and president of NACD. He says that directors spend an average of 207.4 hours on board work, with 98 of those hours spent on committee work.

"Differential pay for committee chairs is clearly understandable, yet it is also important to remember that higher pay for committee work in no way reduces the accountability of all board members for important board decisions," Daly adds. "Committees make recommendations. The board makes decisions.”

Smaller Companies, Too

The report also compared board compensation data from the 200 largest U.S. companies with that of U.S. companies with revenue ranging from $50 million to more than $10 billion, across all industries. Among the findings:

• Total compensation costs for board fees increased, ranging from a median of $448,808 at small companies to $2.02 million at the top 200. As a percentage of revenue at those companies, total compensation ranged from 0.19 percent at smaller companies to 0.01 percent at the top 200.

• Benefits and perks are more prevalent at large companies
and more likely to be disclosed. Specifically:

-- Gift matching/charitable gifts
are most prevalent across all companies, ranging from 0.9 percent at smaller companies up to 37 percent at the top 200 companies.

-- Life/health insurance
is the next most prevalent perk, but in single digits in terms of prevalence until the top 200 companies (25 percent of which offer the benefit).

Directors' Stock Compensation

Another trend: Eighty-nine percent of the top 200 companies reported using full-value shares of company stock in director compensation packages. Only 35 percent of companies use stock options.

"Equity is an important tool for aligning boards with shareholders,” Daly says. "With the exception of the smaller companies in the survey, the majority are following the NACD's recommendation of providing at least 50 percent of compensation in the form of equity.”

Guidelines for stock ownership by directors are now common, with 84 percent of the top 200 companies having guidelines in place, deferring share awards until retirement, or both. In 2007, ownership guidelines increased 23 percent at "smaller” companies compared with a year earlier, but their prevalence grew proportionately as the size of company revenues increased.

Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area.

Related Articles:

Examining Relations with Comp Consultants: Advice for Compensation Committees, SHRM Online Comp & Benefits Focus Area, December 2005

CEO and Directors’ Pay Raises Are, Again, Higher All Round, SHRM Online Comp & Benefits Focus Area, November 2005

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