Is It the End for Big Director Pay Raises?

Ever so slightly, shareholders are starting to work up some concern over board compensation, which has risen annually in the double digits in recent years, a new study shows.

With executive compensation being thoroughly vetted — and not just at companies that take federal bailout money — will closer scrutiny of directors’ pay be far behind?

Maybe not, though until recently, few shareholders have objected to board compensation, despite the fact that it has risen steadily in recent years. That comfort came mostly out of a desire to attract and retain directors who are motivated and committed to their oversight roles.

Now one corporate governance research firm is seeing a slight shift in that attitude. “Just in this past year, I’ve started to notice a few people saying, about some companies at least, that the directors are being paid a lot of money, but are they really doing that good of a job?” said Paul Hodgson, senior research associate with The Corporate Library.

Still, Hodgson isn’t sold on the idea that a revolution is at hand, at least not yet. “I’ll believe it when I see it. I don’t think it will be particularly widespread,” he added.

One thing that is sure to show up in this year’s crop of proxy statements is the reduced value of stock and stock options used as compensation for directors. Because of the steep market losses, many proxies filed this year, and probably next year too, will show directors as having had negative compensation.

That has already happened to some companies. At one, Thornburg Mortgage, the negative value of equity-based compensation pushed the company to record the steepest decline noted in board pay in The Corporate Library’s Director Pay 2008 study.

The study, released yesterday, included non-executive director compensation for 3,096 companies. Most of them were in the Russell 3000 index, but there was a smattering of others, some of which had fallen out of the index but are expected to reappear in it, and some the research firm covers because of client requests. The study examined 2008 proxies filed before August 1, so the reported data mostly reflects compensation paid during 2007 fiscal years.

According to the report, it was the third straight year of double-digit increases for both individual directors and entire boards. Individuals earned a median of almost 12 percent more than the previous year, but because the average board shrunk in size, the median total board pay climbed only 11 percent.

Hodgson attributed the steady climb of director compensation to the tightened regulatory environment spurred by the big corporate scandals earlier in the decade and the resulting passage of the Sarbanes-Oxley Act.

The company with the highest board compensation was Valero Energy Corporation, with almost $16.5 million. Then came Freeport McMoRan Copper & Gold ($14.7 million), Alleghany Corporation ($11.1 million), Sun Microsystems ($9.7 million), and Dell Inc. ($9.4 million).

However, the figures for many companies at the high end of the list were distorted by very large compensation awarded to one or two directors who tended to be former CEOs of the companies. By eliminating companies that had up to two directors who received more than 50 percent of total board compensation, a very different list emerged. Freeman McMoRan moved to the top, and the other four companies among the first five were replaced by Gilead Sciences, Goldman Sachs, XL Capital, and American Capital Strategies.

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