Executive and Director Compensation - Directors & Boards

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spring 2008 

Boardroom Briefing 

A publication of Directors & Boards magazine and GRID Media LLC 

Executive and Director Compensation 

Executive compensation trends 

Director pay exposed 

Pay equity 

Issues for compensation 

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SPRING 2008 

Boardroom Briefing 

Vol. 5, No. 1 

A publication of 

Directors & Boards magazine 

and GRID Media LLC 

David Shaw 

GRID Media LLC 

Editor & Publisher 

Scott Chase 


Advertising & Marketing Director 

Nancy Maynard 


Account Executive 

Putting Order into an Unruly Subject................................ 4 

James Kristie 

Opening Keynote: 

Four Trends in Executive Compensation. ............................ 6 

Seymour Burchman and Blair Jones 

Thinking About Pay Equity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 

Troy M. Calkins 

What Happens When Shareholders Aren’t Making Money................14 

Jack Dolmat-Connell 

The Directors & Boards Survey: Executive and Director Compensation. .....16 

Director Pay Exposed!.......................................... 22 

Paul Hodgson 

High Technology Board Compensation.............................. 25 

Ed Speidel and Rob Surdel 

Preparing for the Compensation Committee Meeting .. . . . . . . . . . . . . . . . . . 28 

Terrence Ahern 

The Evolution of the Compensation Committee. ...................... 30 

Donald P. Delves 

Closing Keynote: 

The Compensation Committee’s Evolving Agenda. .................... 32 

Gary Locke and Paula Todd 

Directors & Boards 

James Kristie 

Editor & Associate Publisher 

Lisa M. Cody 

Chief Financial Officer 

Barbara Wenger 

Subscriptions/Circulation 

Jerri Smith 

Reprints/List Rentals 

Robert H. Rock 

President 

Art Direction 

Lise Holliker Dykes 

LHDesign 

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Boardroom Briefing: Executive and 

Director Compensation 

is copyright 2008 by MLR Holdings 

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Boardroom Briefing: Executive and Director Compensation 3

Putting Order into an Unruly Subject 

By James Kristie 

In a turbulent market, you need to be especially skillful in linking contribution and reward. 

I often wonder if what drives the fierceness of the scrutiny on 

compensation is this sense that “By golly, if we’re being underpaid 

we better be darn sure that Mr. Big isn’t being overpaid.” 

Is there 

a hotter 

James Kristie subject right 

now executive compensation Or 

one that’s more emotionally laden 

Everybody’s got their hand in 

the till, so to speak. The SEC 

is ratcheting up its reporting 

requirements on compensation this 

year. Shareholders want a say on 

pay this upcoming proxy season. 

There is no place to hide from 

an inquisitive media, especially 

now with the blogosphere and 

other digital denizens expanding 

discovery and discussion. An 

army of governance experts 

readily renders judgment on the 

pay-for-performance link, or, in 

headline cases, pay-for-failure. Pay 

consultants have a new pipeline of 

business right into the boardroom. 

Top-gun lawyers are representing 

their top-gun CEO clients in wage 

negotiations. And compensation 

committees are scrambling to craft 

pay packages of growing complexity. 

And that’s all good. That’s the way 

it should be—in a robust market 

for talent. 

Let’s face it. Who among us—from 

the CEO to the proverbial mailroom 

clerk—feels we are justly paid I 

don’t see many hands raised. 

We’re always looking up and 

looking out for comparison markers. 

More importantly, we’re looking 

at the value we’re creating for our 

organizations—which is often not 

appropriately recognized by the 

marketplace—and the expectations 

that are being placed on us. For 

public company CEOs, performance 

expectations are excruciating. 

Just look at how many CEO 

changes were made in the first 

month of 2008. 

There is so much emotion— 

conscious and subconscious— 

invested in compensation decision 

making and receiving. It’s so much 

a matter of self worth and dignity. 

I often wonder if what drives 

the fierceness of the scrutiny on 

compensation is this sense that “By 

golly, if we’re being underpaid we 

better be darn sure that Mr. Big 

isn’t being overpaid.” (I especially 

imagine pay-challenged members 

of Congress and regulatory agencies 

being susceptible to this mental 

agitation.) 

It seems that the whole world 

is ready to pounce on perceived 

piggishness at the pay trough. 

Let’s turn to this Boardroom 

Briefing on Executive & Director 

Compensation to simmer down 

some of that emotional heat that 

skews pay debates. 

This is our second volley at 

providing a set of briefings on 

being fair and rational in your 

compensation decision making. We 

previously published a briefing book 

in Winter 2005 that put some order 

into this unruly subject. 

With the aforementioned SEC 

getting hot up on who’s making 

what—and why they are making 

what—and Congress spewing venom 

yet again on executive paychecks, it 

is time anew to assemble of team of 

pay pros to guide us on the skillful 

rewarding of CEO and senior team 

performance. 

This report also includes board 

compensation. I know that if I asked 

an audience of directors if they felt 

they were underpaid, I’d see a sea 

of hands. 

So sit back, breathe deeply, let go 

of your emotions, and absorb some 

of the latest thinking on doing the 

right thing to recognize talent and 

contribution. 

James Kristie is editor and associate publisher 

of Directors & Boards. He can be reached at 

jkristie@directorsandboards.com. 

4 Boardroom Briefing: Executive and Director Compensation

Where directors 

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We can help 

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To find out more, visit us at 

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Opening Keynote: 

Four Trends in Executive Compensation 

By Seymour Burchman and Blair Jones 

Beware the unintended consequences of these well-intentioned approaches to compensation. 

The last 

several 

years have 

been ones of 

transformative 

change 

and high 

pressure for 

executive and 

Seymour Burchman stock-based 

compensation. 

Legislators, 

regulators, 

shareholder 

activist groups, 

and the media 

continually 

weigh in on 

executive pay 

decisions. 

Blair Jones 

And given 

the tentative financial outlook, one 

can expect ever-greater heat in the 

executive pay arena even as the 

economy cools down. 

These converging forces—combined 

with the desire of boards to do 

right by shareholders—have 

prompted a majority of companies 

to scrutinize and revamp their 

executive compensation programs. 

The solution for many has been 

to increase the use of long-term 

performance plans, particularly 

performance restricted stock 

and performance shares. The 

commitment to link pay and 

performance is clearly the right 

direction, but these two popular 

choices present challenges, which 

may not have been fully considered 

by the boards that approved the 

plans. 

In their quest to do the right thing, 

companies too often blindly follow 

the crowd without fully examining 

the many consequences associated 

with the choice. We have selected 

four of today’s executive pay 

trends related to the higher use of 

long-term performance plans and 

explored the challenges associated 

with each. We offer the discussion to 

help companies decide whether their 

fixes are achieving their desired 

objectives, or whether they may still 

be in need of a longer term cure. 

Promoting performance 

restricted stock/ 

performance shares 

Enron and Worldcom gave stock 

options a bad name, causing 

companies to abandon stock options 

in favor of service-vested restricted 

stock. Yet, many boards quickly 

realized that, as was the case 20 

Should executives be held to goals 

in spite of changes in the economy or sector 

that makes the goals more challenging to achieve 

years ago, service-vested restricted 

stock represents largely guaranteed 

pay that lacks much in the way of 

performance. The solution: more 

selective use of service-vested 

restricted stock and replacing it, 

especially for more senior executive 

levels, with performance-vested 

restricted stock or performance 

shares. 

Done right, performance restricted 

stock can powerfully focus 

organizational efforts, and it can 

provide equivalent or better leverage 

than stock options. However, in 

our view, too many companies 

quickly embraced performance 

restricted stock as “the answer” 

without adequately considering the 

challenges associated with selecting 

the right performance measures and 

setting appropriate goals. The latter 

has been exacerbated in today’s 

uncertain economic environment. 

As a result, many plan participants 

may not understand how the 

performance plan works, or find it 

demotivating because they lack line 

of sight to the goals. 

Performance measures must reflect 

the drivers of value in the business 

and be consistent with the business 

imperatives. Thus, they become 

a critical management tool for 

communicating and implementing 

strategy. Companies that tie the 

earn-out of restricted stock to 

the performance of autonomous 

business units must make sure the 

measures reflect the business units’ 

particular circumstances, which 

might vary significantly from one 

business to another. 

Goal setting may present a bigger 

challenge. Companies using multiyear 

performance periods often 


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choose one of several courses: they 

base the goals on a) performance 

relative to peers or a broader market 

index, b) their three-year business 

plan, or c) fixed targets that reflect 

longer-term sustained aspirations 

for the business. Others have 

succumbed to this challenge and 

instead have moved to annual goals. 

More about this below. 

We suggest that companies 

considering performance restricted 

stock ask themselves the following 

questions: 

• What is the most appropriate basis 

for setting goals: business plans, 

fixed goals, or relative to peers 

(assuming there are an adequate 

number) 

• If based on business plans, should 

executives be held to goals in spite 

of changes in the economy or 

sector that makes the goals more 

challenging to achieve 

• If awards are adjusted, on what 

basis will adjustments be made 

and how will symmetry be 

ensured, such that achievement 

in the face of severe obstacles 

or challenges is rewarded while 

underachievement is also taken 

into account 

• How will unplanned events, 

like major acquisitions, be 

accounted for 

• If based on relative performance 

are boards willing to pay for 

good relative performance even if 

shareholders lose (though value of 

shares does decline) 

• If based on fixed goals, can they 

accept potentially prolonged 

periods of up or down markets, 

where the plan may not pay out 

Adopting shorter performance 

periods in long-term 

performance plans 

As noted above, companies adopting 

performance restricted stock and 

performance shares face goal-setting 

challenges. In fact, many companies 

find it tough to project goals beyond 

one year. Consequently, a oneyear 

performance period, typically 

followed by two to three years of 

vesting once an award is earned, has 

come into vogue. While an annual 

time frame facilitates goal-setting, it 

ushers in a new set of issues. 

First, tying both annual incentives 

and a portion of long-term incentives 

to annual results over-emphasizes 

annual performance. With 

greater pressure on a given year’s 

achievement comes greater risk that 

actions may be taken to optimize this 

Discretion fell into disrepute 

in the late 1980s and early 1990s 

because it became synonymous with “forgiveness.” 

year’s results at the expense of next 

year’s. This risk can be mitigated 

in part when the earned stock vests 

over a period of time, requiring 

sustained results in order for stock 

price to grow. A second challenge is 

that shortened performance cycles 

inhibit a company’s ability to address 

payback periods on investments. 

It can divert management from 

clarifying long-term objectives and 

investing appropriately for the future. 

A shortened performance period 

works best for targeted periods of 

time where “the future is now,” and 

showing a track record of one-year 

results is a strategic imperative. 

However, it should not be a sustained 

strategy. 

Companies setting shorter goals 

need to ask: 

• Are there good, solid reasons for 

emphasizing one-year performance 

(e.g., in a turnaround situation, 

initial annual commitments may 

give investors confidence that the 

company can hit its longer term 

goals) 

• If not, would measuring 

performance relative to a peer 

group capture the effectiveness of 

longer-term strategies 

• Might other long-term incentive 

vehicles such as options be more 

effective 

Employing discretion when 

determining awards 

In the midst of economic uncertainty, 

many Compensation Committees 

are applying discretion when 

interpreting incentive plan results 

and determining individual incentive 

awards. Their intent is to ensure 

flexibility to “do the right thing” at 

a time when results may be difficult 

to measure exclusively by formula. 

Discretion can be particularly helpful 

at times of strategic repositioning, 

when milestone goals may take 

precedence over near-term financials. 

However, discretion can also be a 

slippery slope. Discretion fell into 

disrepute in the late 1980s and 

early 1990s because it became 

synonymous with “forgiveness.” 

That’s why Section 162(m) of the 

Internal Revenue Code (i.e., the 

requirement that compensation over 


$1 million be “performance based” in 

order to remain tax deductible) only 

allows for negative discretion. 

While there is a place for discretion, 

it must be consistent with a 

company’s leadership style and 

pay-for-performance philosophy 

(e.g., overuse of discretion could 

undermine a CEO’s “no excuses” 

pay-for-performance philosophy). 

Companies are best served by 

developing a structure for how 

discretion will be employed, for 

example: 

• The extent of adjustments should 

be agreed to by the Committee in 

advance, or, if after the fact, as 

soon as is practical. 

• Adjustments should be 

symmetrical—in some cases 

negative and in others positive. 

• Adjustments should generally only 

be made for non-recurring items 

that were unplanned and material 

in amount. 

• Adjustments for unplanned items 

should be made only if they 

could not have been reasonably 

anticipated (i.e., planning failures 

are not items for adjustment). 

Providing retention grants 

In recent years, retention grants 

have increased in prevalence. In 

certain circumstances, they can be 

very effective. For example, it will 

always be important for a company 

to recognize its very top performers 

and lock them in to the extent 

possible. Retention awards can also 

provide security and help stabilize 

an organization in the midst of 

turnaround or a major strategic 

transition. Targeted retention awards 

are one area where service-vested 

restricted stock can be used with 

high impact. 

Retention awards are most effective 

when they remain isolated to a 

select group or are provided for 

a targeted purpose for a targeted 

period of time. This allows them 

to be more meaningful in size and 

more recognizable as something 

special. Unfortunately, retention 

awards are often considered for 

different reasons—for example, 

the tough economy, anticipation 

of a challenging year, and in some 

cases, multiple years of unrealized 

gains in existing compensation 

programs. Providing grants for these 

reasons calls into question the basic 

premise of incentives—i.e., that 

they are about performance, not pay 

delivery. 

Compensation Committees should 

not feel pressured to provide 

retention awards broadly just 

because incentive awards are not 

paying out. Instead, they should 

take the opportunity to explore 

the underlying reasons for and 

circumstances surrounding nonpayment: 

• Has the company underperformed 

peers 

• Is the current management team 

responsible for these results 

• Were performance goals set based 

on realistic assumptions 

• Have there been factors beyond 

management’s control that have 

affected results, but management 

has actually taken actions that 

have minimized potential damage 

When a company gets to a point 

where a large percentage of the 

population are receiving retention 

awards on a regular basis, it has 

to question whether there’s a 

fundamental issue with the core 

compensation program. 

These four practices are just some of 

the solutions companies are turning 

to in an effort to resolve their 

Compensation Committees should not feel pressured 

to provide retention awards broadly just because 

incentive awards are not paying out. 

executive compensation dilemmas 

and adopt seemingly competitive 

fixes. Perhaps the greatest risk in 

all these fixes is the eagerness of 

many companies and their boards 

to adopt a trend without carefully 

examining its implications, and 

further, assessing whether it is right 

for the company, the executives and 

the shareholders. 

Companies must withstand the 

pressure to change for the sake of 

change, and instead take the time to 

evaluate their strategy, consider the 

compensation implications, make 

sure each change is consistent with 

the strategy, and confirm that all 

aspects of the compensation plan 

are explainable. 

Blair Jones and Seymour Burch are managing 

principals of Semler Brossy Consulting Group 

LLC, an independent executive compensation 

consulting firm that advises management and 

boards of major U.S. companies on all aspects of 

executive pay (www.semlerbrossy.com). Both 

Burchman and Jones work with compensation 

committees and management teams, counseling 

them on compensation designs that best 

meet their business’ needs, ensure alignment 

with shareholders, and yield appropriate pay/ 

performance relationships. 


Thinking About Pay Equity 

By Troy M. Calkins 

Pay equity needs to be on the list of issues considered by compensation committees this year. 

It’s ironic that equity-based compensation and pay for performance 

were initially touted by activists and other critics as means of better 

aligning executive compensation with shareholder interests. 

Pay equity 

is shaping 

Troy M. Calkins 

up to be 

one of the hot topics of the 2008 

proxy season. After last year’s 

focus on the newly expanded 

executive compensation disclosure 

requirements, most observers are 

expecting an increased focus on 

substantive compensation issues 

this year. Internal pay equity has 

been targeted by RiskMetrics Group 

in the 2008 updates to its U.S. 

Corporate Governance Policy, by the 

Council of Institutional Investors 

in a letter to the Securities and 

Exchange Commission (SEC), by the 

SEC in its comments on executive 

compensation disclosure, and 

by numerous commentators and 

politicians. 

The concept of internal pay equity 

at its most basic is a consideration 

of the relationship between the 

pay of the highest compensated 

individual and the pay of the 

lowest compensated individual at 

a given company. The comparison 

is typically done using “all in” 

compensation figures, along the 

lines of the “Total” column in 

a public company’s Summary 

Compensation Table. In some 

cases, the focus may be on the 

named executive officers in the 

proxy statement compared to the 

company’s rank and file employees. 

In other cases, the comparison may 

focus on the CEO compared to the 

other named executive officers or 

to all of the company’s executive 

officers as a group. Some advocates 

see pay equity as a fundamental 

issue of social fairness. Others are 

concerned that large pay disparities, 

particularly between a CEO and the 

CEO’s direct reports, can undermine 

a sense of teamwork and create an 

environment where senior managers 

are reluctant to question the CEO. 

By any measure, observers of 

executive compensation trends all 

agree that internal pay equity has 

suffered in the last few decades. 

The gap between the pay of public 

company CEOs and the pay of the 

officers reporting directly to the 

CEOs has widened since the 1980s. 

The total compensation of CEOs 

expressed as a multiple of the 

total compensation of the lowest 

paid full-time employees of public 

companies has increased at an even 

more dramatic pace. 

The purpose of this article, however, 

is not to decry CEO compensation 

or even to argue that achieving 

improved pay equity should be the 

goal of a public company board 

of directors. Instead, this article 

is intended to suggest that pay 

equity needs to be on the list of 

issues considered by compensation 

committees this year. 

Why focus on pay equity 

The idea of internal pay equity 

as a laudable goal certainly has 

its share of critics. Some find the 

idea inherently socialistic. Others 

feel it is an oversimplified way of 

analyzing executive compensation 

that fails to take into account 

competitive forces in the labor 

market, changes in technology and 

other shifts in the global economy. 

There are many factors that 

have driven increases in CEO 

compensation at a faster rate than 

increases of compensation at other 

levels. The increase in the size and 

complexity of public companies 

is often cited as a major factor, as 

is the increased competition for 

executive talent. Furthermore, most 

observers point to the increased 

use of equity-based compensation 

and pay for performance as a 

major contributor to the rise in 

executive compensation. Some 

find irony in the fact that equitybased 

compensation and pay for 

performance were initially touted 

by activists and other critics of 

executive compensation as means 

of better aligning executive 


compensation with shareholder 

interests. The use of comparable 

company benchmarking has also 

been pointed to as a driver of 

increasing executive compensation, 

as CEOs try to keep up with their 

peers. 

Regardless of how you feel about 

pay equity, as a director of a public 

company it is likely to be an issue 

that you will need to face sooner 

rather than later. 

External pressure 

RiskMetrics Group, through its 

ISS Governance Services unit, 

highlighted a number of poor pay 

practices in the 2008 Update to its 

U.S. Corporate Governance Policy. 

Internal pay disparity, particularly 

an excessive differential between 

CEO total pay and total pay of the 

next highest paid named executive 

officer, is included among the list 

of poor pay practices that may 

lead RiskMetrics to recommend 

withholding votes for director 

candidates. Pay disparity is also 

included in the list of factors 

RiskMetrics will consider in 

deciding how to vote on proposals 

that would give shareholders 

an advisory vote on executive 

compensation, often referred to as a 

“say-on-pay” proposal. 

In a September 2007 letter to the 

Chairman of the SEC, the Council 

of Institutional Investors urged 

the SEC to continue to focus on 

a number of items in executive 

compensation disclosure, including 

internal pay equity. The Council 

focused in particular on overly large 

gaps between the compensation of 

CEOs and other named executive 

officers. Such gaps, in the view 

of the Council, “suggest poor 

compensation program design, 

a weak board and inadequate 

Internal pay disparity is included among the list 

of poor pay practices that may lead RiskMetrics to 

recommend withholding votes for director candidates. 

succession planning.” Accordingly, 

the Council suggested that a 

company’s compensation disclosure 

should include a discussion of 

how the company’s compensation 

committee evaluates internal pay 

equity and the reasons for the 

differences in the amounts awarded 

to each named executive officer. 

The SEC, possibly heeding the 

urging of the Council, addressed 

internal pay equity in the comments 

it made in its Fall 2007 review of 

the compensation disclosure of 

350 large companies. In the public 

statement released by the SEC’s 

Division of Corporation Finance 

about the 350-company review 

process, the SEC Staff was somewhat 

circumspect, noting that “where 

a company’s disclosure, including 

that in the Summary Compensation 

Table, led us to believe that its 

policies and decisions for individual 

named executive officers may be 

materially different, we reminded 

the company of the Commission’s 

statement” that Compensation 

Discussion and Analysis (CD&A) 


Whether or not a compensation committee concludes 

that changes should be made to the company’s 

compensation structure to increase internal pay 

equity, it is important to be able to say in the CD&A 

that the committee has considered the issue. 

should be sufficiently precise to 

identify material differences in 

compensation policies and decisions 

for individual named executive 

officers where appropriate. In the 

actual comment letters, however, the 

SEC staff was more direct on this 

subject. For example, a comment 

in one of the letters read: “We note 

a disparity between [the CEO’s] 

compensation and that of the other 

named executive officers. Please 

disclose how and why [the CEO’s] 

compensation differs from that of 

the other named executive officers. 

If policies or decisions relating to a 

named executive officer are materially 

different than the other officers, please 

disclose on an individualized basis.” 

Pay equity and the 

compensation committee 

In light of the amount of attention 

being focused on the issue of 

pay equity, a public company 

compensation committee should 

be considering the issue in setting 

compensation and in reviewing the 

CD&A in this year’s proxy statement. 

Whether or not a compensation 

committee concludes that changes 

should be made to the company’s 

compensation structure to increase 

internal pay equity, it is important to 

be able to say in the CD&A that the 

committee has considered the issue. 

It would be even better if the CD&A 

could either explain steps that the 

compensation committee has taken 

to reduce the gap in pay between the 

CEO and the other named executive 

officers (or other employees) or to 

explain why the committee feels that 

the relationship between the CEO’s 

compensation and the compensation 

of the other officers is appropriate. 

A compensation committee can 

consider a number of factors in 

evaluating the company’s internal pay 

equity. The first, and simplest, step is 

to take a hard look at the Summary 

Compensation Table or tally sheet 

data for the CEO and the other named 

executive officers and consider the 

reasons for any substantial gaps 

between the “Total” numbers for each 

of them. The next step might be to 

compare the compensation levels of 

the named executive officer group 

with those of the other management 

employees of the company. Some 

compensation committees are even 

carrying the analysis to the point of 

comparing named executive officer 

compensation to entry-level hourly 

employee compensation levels, 

calculating a numerical ratio. Another 

consideration is whether the pay 

gap has grown over the last 5-10 

years and, if so, what factors may 

have contributed to that trend. In 

examining the potential reasons for 

any pay gap, the committee might 

look at peer company compensation 

data, general employment market data 

supplied by consultants and changes 

in a company’s operating structure 

that may have changed the role of the 

CEO over recent years. 

Tackling the issue of pay equity on a 

proactive basis can give a company 

an advantage in dealing with 

institutional and activist shareholders. 

By addressing pay equity in the 

CD&A, or at least being prepared to 

discuss the issue intelligently if it is 

raised by a shareholder, the company 

may be able to head off adverse 

publicity or shareholder proposals on 

executive compensation, particularly 

“say on pay” proposals. Furthermore, 

members of a compensation 

committee that can demonstrate 

that the committee has thoughtfully 

considered pay equity should be 

less likely to receive withhold 

recommendations from RiskMetrics. 

Troy Calkins is a partner at Drinker Biddle & 

Reath LLP (www.drinkerbiddle.com). He can be 

contacted at Troy.Calkins@dbr.com. 

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What Happens When Shareholders 

Aren’t Making Money 

By Jack Dolmat-Connell 

How to increase the link between executive pay and performance. 

There is 

a strong 

overall 

correlation 

between 

executive 

pay and firm 

performance 

in most 

Jack Dolmat-Connell companies. 

But the exceptions to the pay-forperformance 

rule generate the vast 

majority of the negative press, which 

influences public perception and 

governmental reaction. So how should 

executive pay be handled when 

shareholders are not making money 

The board should first consider 

why shareholders are not making 

money. Is it an overall industry 

downturn, or are there problems 

specific to the company One of the 

best ways to analyze this issue is 

to do a performance analysis of the 

company against both its competitors 

and its executive compensation peers 

and those sets of companies against 

the broader market. This analysis 

should look at one and three-year 

revenue growth, income growth and 

P/E ratios of the company versus 

its key competitors and against the 

executive compensation peer group. 

These figures quickly tell where 

the company falls relative to its 

comparators. This relative positioning 

then can be compared to where CEO 

compensation is positioned vis-à-vis 

the marketplace, to ensure there is 

not a significant disconnect (e.g., 

75th percentile pay positioning and 

10th percentile one and three-year 

performance). 

If an industry downturn is the 

cause of the lack of no shareholder 

returns, as happens in many cyclical 

industries, and the company is 

well positioned when the industry 

rebounds, it is important to retain the 

executive talent while at the same 

time being sensitive to the optics 

that would be associated with any 

significant increases of long-term 

incentive grants. If the situation 

is company specific, very careful 

consideration is needed given today’s 

dynamics surrounding executive 

compensation. What if performance 

relative to peer companies is very 

strong, but shareholders are still not 

making money (i.e., “the best house 

in a bad neighborhood”) You need 

to pay executives based on relative 

performance, however, it cannot be 

so much that they are not motivated 

to pursue a different strategy 

(e.g. diversification, acquisitions, 

divestiture, etc.) that “changes the 

neighborhood” so that shareholders 

can make money. 

If the problem of poor shareholder 

returns is specific to the company, 

a critical question is: “Do we have 

the right CEO and executive team in 

place to ultimately drive significant 

shareholder returns” If the answer is 

no, then it is crucial that the company 

develop compensation packages that 

will attract the executive talent the 

company needs. If the answer is yes, 

then the compensation packages that 

are in place must be sufficient to 

retain the executive talent for the time 

it will take to generate shareholder 

returns and have the potential 

for significant rewards when the 

shareholder returns are eventually 

achieved. 

Competing objectives 

It is also important to understand 

that there are competing objectives 

surrounding executive compensation 

programs. Executive pay programs 

must attract, retain and motivate the 

executive talent as well as be linked 

to shareholder returns. A program 

can be shareholder friendly but at the 

same time not enable the company 

to attract and retain the executive 

talent it needs. Conversely, it can 

certainly be structured to attract and 

retain the necessary talent and yet 

not be shareholder friendly. The right 

program will satisfy both objectives. 

In order to satisfy these competing 

objectives, it is necessary to truly 

understand the perspectives of all 

key stakeholders. Interviews with 

management and the board using a 

structured set of questions will elicit 

their needs and objectives. It is also 

very useful to understand where 

large shareholders are, what they 

are looking for, and what they are 

willing to support. We have found 

that these stakeholders are generally 

very willing to talk about both the 

levels and structure of executive 

compensation. 

Once the perspectives of all 

stakeholders are understood, there 

are several design principles that in 

most instances should be followed 

when the company is struggling and 

shareholders are not making money. 

However, keep in mind that each 


situation is unique and that there are 

no cookie cutter answers: 

1. Keep base salary increases flat or 

low. For public companies, keep in 

mind that executive salaries must be 

disclosed in the CD&A, and employees 

will compare those increases to the 

level they are receiving. 

2. Bonuses should be structured 

to pay out based solely on the 

two to three metrics that will 

most drive future increases in 

shareholder return. Our work 

has found that organic revenue 

growth, income growth, and cash 

flow are the financial metrics 

that drive shareholder return, 

regardless of industry. The nonfinancial 

metrics that can ultimately 

improve the financials vary much 

more significantly by industry and 

should be tailored to your particular 

situation. Examples of some very good 

non-financial metrics we have seen 

are improving manufacturing quality, 

improving customer satisfaction 

levels, and getting a new product 

introduced by a certain date. 

3. Long-term incentives should be 

heavily performance focused. Grants 

should be primarily in the form of 

stock options or performance-based 

restricted shares so that executives are 

linked to shareholder value creation. 

The desire to grant significant timebased 

restricted shares is strong given 

retention concerns or to extend the 

life of the share pool, but this is the 

worst choice from a shareholder optics 

perspective. The reason is that timebased 

restricted shares have value 

to the executives even if the stock 

price remains flat or declines, and 

shareholders have no increase in value 

in their investment. 

4. Significant severance and Changein-Control 

arrangements should not 

be put in place during this time. 

If they are necessary and have not 

been implemented thus far, make 

certain that the arrangements are 

conservatively structured and that 

they drive the right behaviors and 

outcomes. Executives should not have 

an incentive to be terminated or to 

sell the company if it is not in the 

absolute best interests of shareholders. 

The negative optics of significant 

severance arrangements for nonperformance 

is not what shareholders 

or employees want to see during 

difficult times. 

5. Any executive compensation 

arrangements need to be viewed 

through the lens of how both 

investors and employees will view 

the changes. Investors want to know 

that executives are not paid for nonperformance, 

and they want plans 

that are strongly aligned with their 

interests, both short-term and longterm. 

Remember that shareholders 

came into the stock at different 

times and prices, and have different 

investment time horizons, so their 

perspectives will differ. Employees 

want to see that executives are not 

getting compensation raises while 

they suffer job cuts, increased medical 

premiums, low merit budgets/ 

increases, etc. Broader employee 

morale and productivity are necessary 

for a successful turnaround, so 

employee reaction to any disclosed 

changes (and employees do look at 

executive compensation disclosures) 

must be factored into the equation. 

6. It is imperative that the board 

receive truly independent advice 

from a third party during this 

time. True independence means 

that the firm working for the board 

is providing no other services to the 

company. Additionally, the concept 

of “dueling consultants” (the board 

and management each having their 

own consultant) is counterproductive 

and unnecessary. The right firm 

can balance the needs of both 

management and the shareholders, 

which is necessary in the design of 

the right program. 

The risks of not adhering to these 

principles are significant in this 

day and age of increased scrutiny 

surrounding executive compensation 

and corporate governance. Boards 

need to consider the possibility of: 

• Shareholder “No” votes with respect 

to re-election. 

• Shareholder proposals with respect 

to executive pay. 

• “No” votes on long-term incentive 

share plan proposals. 

Boards should look at the totality 

of the situation and each and every 

factor needs to be considered. Blindly 

following peer group norms may not 

be in the best interests of executives 

and shareholders. That said, anything 

that is outside of market norms must 

be highly defensible, optical favorable, 

and strongly aligned with shareholder 

interests. 

Jack Dolmat-Connell is president and CEO of 

DolmatConnell & Partners, Inc.. His consulting 

experience includes serving as managing director and 

National High Technology and Life Science Practice 

Head for Pearl Meyer and Partners, managing director 

and East Coast Practice Leader for iQuantic, managing 

director and National Consulting Practice Leader of The 

Wilson Group, and president and founder of Solutions 

at Work. His corporate experience includes serving as 

senior vice president of Global HR for Geac Computer; 

senior director of compensation, benefits and HRIS at 

Avid Technology and Stratus Computer; and various 

HR, and compensation and benefits roles at Digital 

Equipment Corporation and Data General Corporation. 

He earned a Bachelor’s Degree in Economics from the 

University of Michigan and an MBA in Organizational 

Behavior and Corporate Strategy from the University 

of Michigan Ross Graduate School of Business. He has 

also been an adjunct professor at Bentley College and 

Babson College, and an instructor for WorldatWork. 


The Directors & Boards Survey: 

Executive and Director Compensation 

Methodology 

This Directors & Boards survey 

was conducted in December 

2007 via the web, with an email 

invitation to participate. The 

invitation was emailed to the 

recipients of Directors & Boards’ 

monthly e-Briefing. A total of 324 

usable surveys were completed. 

About the respondents 

(Multiple responses allowed) 

A director of a publicly held company 44.1% 

A director of a privately held company 44.7% 

A director of a non-profit entity 37.9% 

A senior level executive (CEO, CFO, CxO) 

of a publicly held company 9.9% 

A senior level executive (CEO, CFO, CxO) 

of a privately held company 21.7% 

Institutional shareholder 1.2% 

Other shareholder 21.7% 

Academic 8.1% 

Auditor, consultant, board advisor 15.5% 

Attorney 12.4% 

Investor relations professional/officer 0.6% 

Other 5.6% 

(Other responses included: corpoate secretary, 

manager corporate governance, public 

relations professional, insurer) 

Revenues 

(For the primary company of the respondent) 

Average revenues: 

$2.48 billion 

Less than $250 million 45.6% 

$251 million-$500 million 8.2% 

$501 million to $999 million 7.6% 

$1 billion to $10 billion 30.4% 

More than $10 billion 8.2% 

Board service 

(Average number of boards respondents serve) 

Public 1.33 

Private 1.74 

Charitable 1.86 

Board size 

(Average size of respondents’ primary board) 

Total Board Members 8.48 

Respondents’ age 

Average Age: 56.5 

40 

35 

30 

25 

20 

15 

10 

CEO compensation 

At your primary company, what 

was the total CEO compensation, 

including salary, bonuses, long 

term compensation, benefits and 

perquisites, for 2007 ($US) 

5 

0 

1.9% 5.0% 17.5% 

Average: 

$1.9 million 

(An increase of 43% over our October 

2005 survey) 

30.6% 

37.5% 

7.5% 

21-29 30-39 40-49 50-59 60-69 70+ 

Less than $250,000 20.0% 

$251,000 to $500,000 20.0% 

$501,000 to $999,000 12.5% 

$1 million to $2.5 million 25.0% 

$2.6 million to $5 million 12.5% 

$5.1 million to $7.5 million 3.3% 

$7.6 million to $10 million 1.7% 

More than $10 million 4.2% 

Other 0.8% 


Was this total compensation: 

Higher than the previous year 50.8% 

About the same as the previous year 39.2% 

Lower than the previous year 8.3% 

Other 1.7% 

As a board member, do you 

feel that CEO compensation 

for your primary company is 

generally: 

Too 

low 

Other 

Too high 

5.0% 

1.7% 

16.0% 

77.3% 

Approximately 

correct 

Percentage of CEO’s pay package 

is cash compensation (salary and 

bonus), as opposed to long term 

incentives and perquisites at your 

primary company: 64.79% 

(69.45% in our October 2005 survey) 

What is the approximate average 

worker compensation at your 

primary company (including salary, 

bonuses and benefits 

Average: $58,177 

Less than $30,000 3.7% 

$30,001-$40,000 15.0% 

$40,001-$50,000 15.0% 

$50,001-$60,000 21.5% 

$65,001-$70,000 15.0% 

$70,001-$80,000 15.0% 

More than $80,000 15.0% 

Ratio of CEO pay to average 

worker pay, including benefits and 

perquisites: 32.6:1 

(38.5:1 in our October 2005 survey) 

If you were recruiting today for a new 

CEO, would you expect to: 

Pay significantly more than 

you pay now 10.9% 

Pay somewhat more than 

you pay now 44.5% 

Pay the same amount as you do now 39.5% 

Pay less than you do now 5.0% 

CEO compensation practices 

Please offer your opinions 

on the following statements, 

using your primary company. 

CEO compensation levels accurately 

reflect superior performance against 

stated goals and objectives 

My company has a comprehensive 

and easily understood method 

for computing CEO and executive 

compensation 

The compensation of our top 

executives is in line with and 

consistent with our company’s 

revenue and profit performance and 

expectations 

CEO and executive compensation 

is tied directly to sustaining and 

increasing shareholder value 

The compensation of our CEO and top 

executives is in line with comparable 

industry and company standards 

All employees at our company can 

determine through available company 

documents and regulatory flings the 

compensation program of our top 

executives 

In your opinion, 

are CEO 

compensation 

levels: 

Agree 

Strongly 

Agree 

Neither 

Agree Nor 

Disagree 

Disagree 

Strongly 

Disagree 

21.9% 45.6% 19.3% 9.6% 3.5% 

17.5% 56.1% 14.9% 10.5% 0.9% 

23.7% 57.9% 14.0% 4.4% 0.0% 

23.9% 47.8% 15.0% 11.5% 1.8% 

19.3% 56.1% 14.0% 7.9% 2.6% 

28.1% 30.7% 15.8% 17.5% 7.9% 

A greater issue than last year 16.7% 

A major continuing issue 50.0% 

Less of an issue than last year 20.2% 

Other 13.2% 

Other responses included: A continuing issue. 


Have you reduced or 

withheld a bonus for your 

CEO or senior executives 

within the past 12 months 

Selected Comments 

With the push for say on pay, there 

will continue to be focus on the level of 

pay to CEOs, especially if returns are 

less favorable in 2008 and pay is up 

significantly. 

Although public outcry does not 

appear to have increased much 

lately, the number of “out of whack” 

compensation arrangements 

(i.e., exceptionally high levels of 

compensation despite lackluster, even 

bad, company performance) still does 

not seem to be a subject of serious 

No 

Other 

73.5% 

2.7% 

23.9% 

Yes 

concern/action in most board rooms. 

The concentration of ownership among 

institutions and their short-term focus 

on share price has increased the career 

risks for CEOs and driven up CEO 

compensation to levels that invite 

criticism and which have decoupled, 

in too many case, the quality of effort 

from the quality of results. But at the 

moment, it’s a “continuing problem” 

rather than an increasing problem. 

The press coverage of outlier pay 

packages continues at a fever pitch. 

Outside interests, including ISS, Glass 

Lewis, unions and pension funds 

(primarily public employee) also 

continue to make exec compensation a 

major issue. 

The continued focus on executive 

compensation by activist shareholders 

and others with an ax to grind 

highlight this issue as an easy point of 

entry into board debate and disruption 

of the annual meeting and governance 

processes. It’s not an unimportant 

issue but in the larger scale of business 

concerns it is getting far too much 

negative attention. 

Large severance payments in 

controversial situations and the stock 

option backdating scandal make 

exciting headlines and make it look 

like a “rigged” game. The public, the 

media and critics conclude that the 

whole game is fixed. 

The noise surrounding executive 

compensation seems to have died out 

a bit, especially in light of increasingly 

bad economic news, which is taking 

precedence now. 

Getting what you pay for… 

Compensation 

for exceptional 

performance 

Advisors to compensation committees 

on executive compensation 

email: ddelves@delvesgroup.com www.delvesgroup.com 

Call 312-441-9711 


Compensation committees 

In your opinion, who really controls 

the compensation process 

in your primary company 

Management 18.0% 

Compensation Committee 51.4% 

Board of Directors 33.3% 

Other 6.3% 

Other responses included: Small clique 

of board members; Comp Committee 

controls the CEO pay, management 

controls the staff compensation; 

Executive Committee; There is a robust 

labor market for executives--supply and 

demand sets pay; the CEO). 

In your opinion, do the members 

of your company’s compensation 

committee have the skill and 

knowledge to perform their duties 

Yes 46.4% 

Yes, but could use some 

additional training and education 36.4% 

Yes, but could use significant 

additional training and education 10.9% 

No 2.7% 

Other 3.6% 

Is your compensation committee 

composed entirely of independent, 

non-employee directors 

No 

Other/ 

not applicable 

24.1% 

4.5% 71.4% 

Yes 

No 

Are you a member of a 

compensation committee 

Other responses included: Former 

member of compensation committee; 

board too small to have separate 

comp committee. 

Other 

Yes, chairman 

19.6% 

2.7% 

38.4% 

Yes, 

member 

Does your compensation committee 

use outside consultants and 

attorneys 

Are these consultants/ 

attorneys selected by: 

Management 8.5% 

Board/compensation committee 57.4% 

Both board/compensation committee 

and management 18.1% 

No 

Other 

27.9% 

2.7% 69.4% 

Yes 

39.3% 

Separate compensation consultants/ 

attorneys for board and management 5.3% 

Other 10.6% 

Director compensation 

Does your primary company’s 

director compensation 

accurately reflect the time and 

risks involved in board service 

Other responses included: 

it’s too high; no board 

compensation; generally, but 

tending to fall behind. 

No 

Other 

Unsure 

3.7% 

14.8% 

28.7% 

52.8% 

Yes 

At your primary company, has 

director compensation increased in 

the past two years 

Yes, substantially 9.7% 

Yes, somewhat 41.7% 

No, it has remained the same 45.6% 

No, it has decreased 2.9% 


How are directors at your primary 

company compensated 

(Multiple responses allowed.) 

Annual retainer/base fee 76.2% 

Additional fees for committee work 54.5% 

Per-meeting fees 45.5% 

Options/stock grants 57.4% 

Travel expenses reimbursed 69.3% 

Other expenses reimbursed 28.7% 

Benefits 5.9% 

50 

40 

30 

20 

10 

0 

44.3% 

Less than 

$50,000 

26.4% 

$50,000 to 

$100,000 

24.5% 

$100,001 to 

$200,000 

D+B_Half-Pg_Vert_Ad2.qxp 2/7/2008 3:01 PM Page 1 

What is the approximate average 

annual compensation package 

(including benefits and 

perquisites) of a typical director 

at your primary company 

4.7% 

More than 

$200,000 

Average: $81,698 

What can be done to improve 

director compensation 

Director compensation should be a 

balance between stock and cash every 

year. 

It should have been linked directly with 

the performance of the company and 

the increase in shareholder value 

Provide a pay for performance plan for 

directors contributions above normal 

service 

Trusted Advice on 

Executive Compensation 

My board currently has no form of 

long term compensation. We are paid 

for meetings, for committee time 

and a bonus based upon annual 

performance. I am pushing for some 

form of “phantom stock” program that 

would tie in more directly to growth in 

value of the company. 

Require a bi-annual review of board 

compensation by an independent 

consultant. 

Board members need to be realistic in 

compensation for themselves. Many 

board members are very reluctant to 

increase board compensation because it 

may look bad. 

Compensation should more accurately 

reflect the work load and risk. Smaller 

companies tend to require more work 

and risk but compensation is more 

orientated toward peer groups rather 

than effort expended. 

For a complimentary copy of our latest anthology, 

The Year in Executive Compensation, visit us at: 

www.towersperrin.com/yearinec. 

Director compensation should be better 

tied to the performance of the company 

and the value created for shareholders, 

both positively and negatively. 


Director Pay Exposed! 

By Paul Hodgson 

For the first time ever, investors have been able to see exactly how much directors at public 

companies earned in the year. 

Although 

director 

compensation 

has not 

experienced 

the kind of 

scrutiny given 

to executive 

compensation, 

Paul Hodgson the level of 

disclosure resulting from the new 

SEC requirements represents a step 

forward. Even though most directors 

are responsible for setting their own 

pay levels, perhaps because of it, 

aggregate compensation levels for 

directors are still well below the radar 

screen of the press and most investors, 

even though there have been some 

fairly substantial increases over the 

last few years. Such increases have 

been closely related to increases in 

workload, at both the committee and 

board levels and have largely been 

felt to be justifiable by the investment 

community. 

While director compensation has not 

been under scrutiny, like executive 

compensation, its disclosure was 

revolutionized by the new regulations 

introduced last year by the Securities 

and Exchange Commission (SEC). 

The 2007 proxy season was the first 

year that companies had to disclose 

in detail what directors earned, 

because the SEC mandated a new 

summary compensation table for 

directors structured very similarly to 

that required for executives. Many of 

the additional amounts required to be 

disclosed—cash incentives, perquisites 

and changes in the value of retirement 

benefits—were unknown in prior 

years. In addition most companies 

failed to calculate the potential value 

of stock or option awards. 

Pay rises 

Below, we provide an analysis of the 

increases in individual director and 

board compensation from the last 

three director pay surveys published 

by The Corporate Library 1 . 

The Corporate Library has been 

providing detailed calculations 

of “real time” compensation for 

Table 1: Director Total Compensation Increases 

Individual Director 

Total Compensation Increases 

directors for three years, based on our 

knowledge of committee membership 

and status, number of committee 

and board meetings, and election 

dates. Nevertheless, the amount of 

‘disclosed’ compensation is likely 

to have increased between 2005/6 

and 2006/7, because of the new 

requirements. For this reason, readers 

should see compensation increases for 

directors over this period as increases 

in disclosed compensation. The 

1 Director Pay 2004/2005, Director Pay 

2006/2007 Vols. I and II. 

calculation includes any increase in 

cash or equity retainers, as well as the 

additional disclosure of compensation 

mandated by the new regulations. 

Increases are—as always—based on a 

matched sample of directors who have 

been on the same board for the full 

24-month period. 

In total, The Corporate Library’s 

Director Pay Report 2007 includes 

compensation data on 25,363 separate 

directorships. The 2004/2005 report 

was based on 14,470 separate 

directorships. A directorship is a single 

board position held by a director. For 

Total Board Cost Increases 

2006/7 2004/5 2006/7 2004/5 

Median 12% 17% 12% 20% 

Average 39% 40% 45% 68% 

Source: The Corporate Library 

the latest survey, data was taken from 

proxies filed up to October 8, 2007. 

As has been noted, we have taken the 

precaution of describing compensation 

changes in the latest figures as 

“increases in disclosed compensation” 

because in prior years The Corporate 

Library’s surveys measured the 

grant date value of equity awards, 

while now companies are required 

to disclose the value of stock and 

option awards that vested during 

the fiscal year in question. However, 

in aggregate—as was seen in The 


Corporate Library’s Preliminary CEO 

Pay Survey—the value of equity that 

vested during the year is very similar 

to the grant date value of awards 

except where equity awards are not 

made annually. 

Director compensation levels 

Table 2 shows the average and median 

compensation for directors and boards 

from each of the two most recent 

studies. More than 80 percent of the 

companies in the latest study have 

reported director compensation under 

the new SEC disclosure regulations. 

For the remaining directors and 

for all directors in the prior years, 

we calculated total compensation 

figures with The Corporate Library’s 

unique approach using data that 

includes committee membership, 

chairmanship appointments, number 

of meetings held, tenure and director 

status to produce an accurate estimate 

than $470 billion. For example, the 

difference between the upper quartile 

of annual cash fees in the largest 

companies and upper quartile in 

the lowest is only about $40,000. 

The same amount separates the two 

lower quartile figures. The difference 

between the two quartiles for option 

awards is only around $6,000, with 

the range of stock awards lying 

between these ranges. This would 

appear to show that compensation 

for directors of the vast majority of 

companies does not vary by a huge 

amount, indicating that directors are 

as valuable to small companies as 

they are to large companies and that, 

potentially, the time commitment and 

the responsibilities of the job vary 

little according to company size. 

Cash/stock compensation 

Table 2: Director Total Compensation and Total Board Costs 

Individual Director 

Total Compensation Increases 

The survey also shows that cash fees 

(which include cash retainers as well 

Total Board Cost Increases 

2006/7 2004/5 2006/7 2004/5 

Median $100,031 $106,732 $785,900 $801,500 

Average $131,413 $127,241 $1,079,000 $1,021,858 

Source: The Corporate Library 

compensation packages over stock 

options, it also shows that the shift 

away from stock options to restricted 

stock began several years ago since 

this data reflects awards that are 

vesting now, but were awarded 

between one and five years ago. 

Around a fifth of directors did not 

receive any cash fees at all, being 

entirely compensated in equity of one 

kind or another. 

Non-regular compensation 

Only a small minority of directors 

received other types of compensation 

beyond cash fees and equity 

awards. The smallest number—not 

surprisingly—was the 69 directors 

who received pay that could be 

classified as non-equity incentive 

compensation (NEIC). Over a 

thousand directors had reported 

compensation under the change in 

pension value and non-qualified 

deferred compensation (NQDC) 

column. But more than 5,000 directors 

had an amount reported in the ‘all 

other compensation’ column, the 

column of the directors’ summary 

compensation table that includes 

information on the cost of perquisites. 

Most of the largest amounts, however, 

were not related to perks but were 

included in the “can’t include it 

anywhere else” category. 

of total compensation. Data for all the 

directorships is included in the table. 

Median figures for individual directors 

and boards are lower in the latter 

survey because of the significant 

expansion in the number of companies 

that the survey covers. Director 

compensation has not decreased. 

Director pay levels—discounting the 

maximum and minimum levels—vary 

very little given that the size of the 

companies in the most recent survey 

varies from $3.6 million up to more 

as any committee membership or 

meeting fees) make up only around 

a third of a typical director’s total 

compensation, with stock awards and 

stock option awards making up most 

of the rest. 

Notably, more directors had stock 

awards vesting during 2006/7 than 

had option awards. Almost 2,000 

more directors vested in restricted 

stock than options in 2006/7. This 

finding not only confirms the 

general impression that restricted 

stock is gaining ground in director 

Women directors outearn their 

male counterparts 

To determine what kind of pay 

differential existed between male 

and female directors, we conducted a 

separate study of pay and gender data 

for over 21,500 directors. This analysis 

shows that median, average, lower 

and upper quartile total compensation 

for women directors exceeds that for 

male directors. This makes being a 

director one of the few jobs in the U.S. 

economy where the pay differential 

is reversed. Of course, fewer than 11 


honorable. Sixty-one titled directors 

eschewed compensation from at least 

one of the companies where they 

were a director, and most of these 

were PhDs or medical doctors. Of the 

more traditional titles, being a knight 

appears to assure directors of higher 

compensation, higher even than Lords 

and Ladies. Professors earn more 

than PhDs, Generals earn more than 

Admirals, and medical doctors are the 

least well remunerated. 

Director pay levels— 

discounting the maximum and minimum levels— 

vary very little given the size of companies. 

percent of directors are female, but 

those that are on boards earn more 

than their male peers. Median total 

compensation for female directors was 

$120,000 compared to $104,375 for 

male directors. 

Do titled directors earn more 

In addition, the most recent survey 

looked at the pay differentials of 

titled directors. It classified directors 

as titled if they are listed in the 

company’s proxy statement with 

a prefix or suffix which denotes 

a special qualification (PhDs and 

above), a position within government 

or the military, or nobility. Only 1,968 

of the more than 25,000 directors in 

the study had a title of one kind or 

another, less than 8 percent. 

The short answer to the question “Do 

titled directors earn more” is yes. 

But of course it depends on the title. 

Even the least well-compensated titled 

director—medical doctors—earn a 

median total compensation that is 

higher than that for all directors, 

$105,181 compared to $100,000, 

respectively. Although the sample 

contains only two judges, judges are 

paid the most among titled directors. 

There may be additional judges within 

The Honorable category, and this may 

be the reason why directors with this 

title earn more than senators and 

governors, who may also be termed 

As with executive compensation, only a 

single year of figures has been disclosed 

for director compensation under 

the new SEC disclosure regulations. 

While this makes comparisons with 

prior years difficult, it does not make 

them impossible. It would appear 

that director compensation levels are 

continuing to rise, though at lower 

rates than were found in the past. 

More importantly, many compensation 

plans and arrangements which were 

poorly disclosed in the past have not 

only been brought into the light but 

have had specific values attributed to 

them. This allows investors a much 

better opportunity to decide whether 

such plans and arrangements are set at 

a level below that which might cause 

concern, or, on the other hand, could be 

considered inappropriately high. 

Paul Hodgson is senior research associate, executive 

and director compensation, for The Corporate Library. 

He is widely considered one of the foremost authorities 

in the field of compensation, having researched and 

written about executive compensation for more than 

sixteen years. He is the chief architect of The Corporate 

Library’s executive and director compensation databases 

and manages the firm’s research report writing and 

publishing. Prior to joining The Corporate Library in 2001, 

he worked for The Executive Compensation Review, 

published by Incomes Data Services in London, and 

wrote the influential Directors’ Pay Report series there. 

He has written a number of books, including Building 

Value Through Compensation, a title in the CCH Board 

Perspectives series. Hodgson is a graduate of Durham 

University (U.K.) and University College, Cardiff, Wales. 


High Technology Board Compensation 

By Ed Speidel and Rob Surdel 

Trends and practices in an evolving boards landscape. 

Board 

membership 

and 

participation 

has grown 

increasingly 

demanding, 

a shift that 

is making 

Ed Speidel its presence 

known in both 

how boards 

conduct their 

responsibilities 

and how 

members are 

compensated. 

Directors sit 

on an average 

2.5 boards, 

Rob Surdel continuing a 

downward trend seen over recent 

years and reinforcing the reality that 

board membership is simply a more 

demanding job today than it was five 

years ago. In 2005, directors spent 

more than 200 hours fulfilling boardrelated 

duties, up from between 100 

to 150 hours pre-Sarbanes-Oxley, 

according to the National Association 

of Corporate Directors. Multiplied by 

the 2.5 boards that directors typically 

serve, the typical director is spending 

about three months a year working on 

board-related issues. 

The article examines governance 

best practices, and current trends 

in outside director compensation, 

based on our analysis of publicly filed 

data from approximately 520 Hightechnology 

companies, representing 

a broad cross-section of the industry 

subsectors and company size. 

Emerging best practices 

At the median, high-tech companies 

have an average of eight directors, six 

of which are independent, compared 

to nearly 11 members on an average 

S&P 500 board (Spencer Stuart, SSBI, 

2007). Further, there are typically 

three members in each of three 

committees: audit, compensation and 

nominating/governance, meaning 

directors typically serve on two or 

more committees. 

Lead director vs. 

presiding directors 

One of the ways boards have 

responded to increased demands 

for tighter governance standards 

is to more clearly define and 

articulate leadership responsibilities. 

In previous years, we’ve seen 

an increased importance of the 

independent, non-executive chair 

role. Although the use of a nonexecutive 

chairman is an important 

aspect of board composition, the 

increased use of lead directors and 

presiding directors is the relevant 

trend. Most S&P companies, for 

example, now have either a Lead 

Director (30%) or Presiding Director 

(64%). Technology company boards 

have been notably slower in creating 

such a role; however, greater than 

50% currently have either a Lead 

or Presiding Director, and we 

expect that trend will continue as 

more companies move to increase 

the independence of the Board. 

The advantages of such a role 

have become clear. Both Lead and 

Presiding Directors: 

• Serve as an ongoing point of contact 

for directors, thereby enhancing 

the board’s independence from 

management 

• Drive agendas and evaluate results 

of the board 

• Convene and chair executive 

sessions for Independent Directors 

• Fill in gaps during organizational 

transitions, such as a CEO departure. 

A minority of high-tech companies, 

23%, have ownership guidelines in 

place, with the practice being more 

prevalent at larger companies than at 

smaller ones. The picture is similarly 

mixed with vesting practices. Most 

companies align director vesting 

schedules to those of the company’s 

executives. 

Boards are growing more disciplined 

and sophisticated in how they 

monitor, evaluate and communicate 

director performance. Whereas at 

the turn of the century performance 

management was virtually unheard 

of at the board level, today boards are 

increasingly evaluating directors both 

at the overall and committee levels. 

Heidrick & Struggles, in its 2006-2007 

Corporate Board Effectiveness Study, 

polled directors for their perspectives 

on evaluation effectiveness. 

Interestingly, about 75% of directors 

believed that the evaluation processes 

for the board as a whole and for 

committees was effective or very 

effective, while fewer than half (48%) 

viewed the processes for individual 


director evaluation as similarly effective. Moreover, the 

overall “somewhat effective” to “very ineffective” figures 

were surprisingly high. We believe this reflects the relative 

novelty of the practice; directors have had to learn how to 

evaluate one another, and how to communicate productive 

feedback. Further, we expect that boards will increasingly 

look to outside parties to conduct the performance 

evaluation and feedback process in order to obtain more 

candid feedback. 

Board Self-Rating of Their Company’s Evaluations 

50 

49% 49% 

Continuing a trend we saw in a similar study a year 

ago, high-technology boards are changing the way they 

think about director cash compensation, shifting from 

a traditional activity-based pay (meeting fees) toward 

role-based pay (retainers). As the days when director 

responsibilities are executed within the confines of a 

meeting rapidly fade, role-base pay is rising in prevalence. 

A majority (56%) of high-tech companies provides a mix of 

retainer and fees; however, most of the total compensation is 

delivered through retainers. At the median, board members 

receive $30,000 in retainers and $1,500 in meeting fees. 

40 

30 

Board Evaluation Process 

Board Committee Evaluation Process 

Evaluation of Independent Directors 

33% 

30% 

Moreover, there is significant variation in high-tech board 

pay based on company size, and in some cases, based on 

industry sub-sector (e.g., telecommunications, networking/ 

storage, semiconductor). 

20 

10 

0 

1% 1% 2% 3% 3% 

Very 

ineffective 

11% 

Ineffective 

21% 21% 

Somewhat 

effective 

Effective 

25% 

23% 

8% 8% 

Very 

effective 

2% 

16% 

Don’t 

have one 

Method of 

All High-Technology 

Compensation 25th Percentile 50th Percentile 75th Percentile n= 

Retainer $20,000 $30,000 $40,000 484 

Meeting Fees $1,000 $1,500 $2,000 303 

Source: Radford analysis of proxy data. 

Source: Heidrick & Struggles, 2006-2007 Corporate Board 

Effectiveness Study 

Board compensation trends 

Our board compensation trend study analyzed board 

member compensation, board leadership compensation 

premiums, committee member compensation, committee 

leadership compensation premiums, initial appointment 

mandatory equity awards, ongoing annual equity awards, 

total retainers and fees, total direct compensation, and 

aggregate compensation. 

Board Member Compensation Delivery (n=519) 

60 

50 

40 

30 

37% 

56% 

Board leadership compensation 

As discussed above, board leadership has been undergoing 

transition over the past couple of years. Almost threequarters 

of technology company boards are now headed by 

either a Lead Director or non-employee Chair. 

Compensation at this level is notably different, depending on 

whether the board leadership is an Independent Chairman 

or an Independent Director. For example, high-tech company 

Independent Chairs receive a 2.0x premium on the board 

member retainer, at the median, in recognition of their role. 

($60,000 vs $30,000) By contrast Lead Directors receive, at 

the median, a 1.4x premium, or $42,000, although it is much 

less prevalent practice (40% of companies). In either case, 

companies are more likely to provide a premium in the form 

of a retainer, rather than a meeting fee. 

Committee member compensation 

20 

10 

0 

Annual retainer 

only 

2% 

Meeting fees 

only 


Both retainer 

and fees 

4% 

None 

The majority (85-90%) of technology companies pay 

some form of additional compensation for committee 

membership. Most typically, if there is additional 

compensation for membership in one committee, there 

is additional compensation for all committees; however, 

audit committee members are the more likely to receive 

additional compensation. 


Retainer Premiums Technology Life Science 

Percent of companies with an Independent Chairman that provide member retainers 70% n=178 78% n=124 

Median Independent Chairman Premium as a multiple of member retainer 2.0x n=124 2.0x n=97 

Percent of companies with a Lead Independent Director that provide member retainers 40% n=189 39% n=62 

Median Lead Independent Director Premium as a multiple of member retainer 1.4x n=76 1.5x n=24 

Meeting Fee Premiums Technology Life Science 

Percent of companies with an Independent Chairman that provide member fees 8% n=113 11% n=87 

Median Independent Chairman premium as a multiple of member fees 1.7x n=9 1.8x n=10 

Percent of companies with a Lead Independent Director that provide member fees 0% n=113 0% n=40 

Median Lead Independent Director premium as a multiple of member fees NA n=0 NA n=0 


All High-Technology (Median) 

Audit Compensation Nominating/Governance 

Retainer $7,000 $5,000 $5,000 

Retainer n= 432 389 340 

Meeting fees $1,000 $1,000 $1,000 

Meeting fees n= 278 263 253 


Equity, total direct compensation 

and aggregate cost 

About two-thirds of all high-tech companies provide equity 

grants to new board members, and 94% provide annual 

grants. Stock options have long been the favored vehicle for 

delivering equity compensation, and that continues to be 

the case, particularly with respect to initial equity grants. 

Similar pay differentiation is seen in committee chair 

compensation, with audit committee chairs receiving 

the highest pay. While nominating/governance and 

compensation committee members are paid roughly the 

same, there is more differentiation for the committee chairs, 

with compensation committee chairs receiving about 25% 

more than their nominating/governance counterparts. 

Total cash compensation 

Total cash compensation is a measure of all cash 

compensation delivered via retainers and/or fees during 

the year for both general board service and committee 

service. In high-tech firms last year, the median total cash 

compensation was $51,200 per director. However, the 

range from high to low, about 2.0x, was significant. 

Equity Award Vehicle (n=519) 

60 

50 

40 

30 

20 

10 

0 

52% 52% 

Stock options 

only 

8% 

25% 

Restricted stock 

only 

Initial equity awards 

Annual equity awards 


4% 

17% 

Options + 

restricted stock 

36% 

6% 

No award 

Total Cash Compensation (n=519) 

Source: 80000 

Radford 

70000 

analysis of 

proxy data. 60000 

50000 

40000 

30000 

20000 

10000 

0 

$70,875 

$51,182 

$36,438 

75th percentile 50th percentile 25th percentile 

However, technology companies have begun to adopt the use 

of full-value shares for annual grants. About 40% of hightechnology 

companies use some form of restricted stock 

(restricted stock only, or in combination with stock options). 

The value of initial equity grants to directors last year was 

$140,000 at the median and was $79,000 for annual grants. 

Only about one-quarter of companies provide additional 

equity compensation for non-employee board Chairs, for a 

median additional value of $65,000. Fewer companies 

(continued on page 34) 


Preparing for the Compensation Committee Meeting 

By Terrence Ahern 

A checklist of matters that deserve attention in the course of the Compensation Committee’s activities. 

If economic expectations for the coming year are different than 

the last several years, should the performance goals and targets be 

modified because of the different expectations 

As one 

prepares 

Terrence Ahern for a 

Compensation Committee meeting, it is 

well to both focus on the Committee’s 

basic responsibility and to consider 

how those responsibilities fit into a 

larger picture. The typical functions 

of the Compensation Committee are 

to discharge the board of directors’ 

responsibility for the compensation of 

the corporation’s executive officers and 

to provide oversight on the corporation’s 

compensation and benefits. These 

functions involve the evaluation of 

the executives’ performance and 

the appropriate compensation, as 

well as the oversight over regulatory 

compliance involved with compensation 

practices. 

After reviewing 350 companies’ 

executive compensation disclosures 

in 2007, the Securities & Exchange 

Commission published a summary 

of their staff’s observations on 

October 9, 2007. The SEC staff 

invested considerable time and effort 

examining the executive compensation 

disclosures of these companies. Their 

analysis emphasized two themes: 

• The Compensation Discussion and 

Analysis should focus more on how 

and why specific compensation 

decisions and policies were made. 

The SEC staff observed that, “This 

does not mean that disclosure needs 

to be longer or more technical; 

indeed shorter, crisper, and clearer 

would often be better. The focus 

should be on helping the reader 

understand the basis and the context 

for granting different types and 

amounts of executive compensation.” 

• The SEC staff also stated that 

the presentation of executive 

compensation information could be 

improved with plain English and 

more graphs and tables. 

Some of the published observations 

may be pertinent to the compensation 

process, not just to the disclosure 

in proxy materials. The following is 

a checklist of matters that deserve 

attention in the course of the 

Compensation Committee’s activities. 

In some instances, the necessary 

compensation disclosure must be kept 

in mind. 

Compensation and 

performance evaluation 

Does the committee utilize a current 

compensation study to compare the 

corporation’s pay structure with 

comparable companies or industries 

If so, how is the study used The 

SEC staff requested a number of 

companies to provide a more detailed 

explanation of how comparable 

compensation information was used 

and how it affected compensation 

decisions. 

Was the compensation study prepared 

by persons with appropriate expertise 

and independence A December 5, 

2007 report by the Committee on 

Oversight and Government Reform 

of the U.S. House of Representatives, 

chaired by Congressman Henry 

A. Waxman, charges that CEO 

compensation is higher in companies 

that utilized a compensation study 

prepared by a compensation consultant 

who had other engagements with the 

same company. 

Were performance goals or targets 

for the executives material to the 

compensation determination How 

should the proxy describe the way 

in which these performance goals 

or targets affected the compensation 

determination The topic of 

performance targets received the 

most comments by the SEC staff, 

as it sought more disclosure in how 

companies used performance targets 

to make compensation decisions. 

If economic expectations for the 

coming year are different than 

the last several years, should the 

performance goals and targets be 

modified because of the different 

expectations 


Are the company’s executive 

compensation packages within 

the mainstream of those offered in 

the industry or are there different 

arrangements elsewhere within the 

industry that deserve consideration 

Are outstanding stock options 

underwater and, if so, should some 

action be taken to provide incentives 

to executives Without canceling 

existing options, the issuance of 

additional options at the lower current 

market price is one possible action in 

response to underwater stock options. 

With the possibility of income tax 

rate increases and AMT tax reform 

on the political landscape, will 

incentive stock options, which may 

be taxed as a long term capital 

gain, be a more effective equity 

compensation arrangement 

Is there anything about the company’s 

executive compensation arrangements 

that may have a negative public 

relations impact if publicized 

Regulatory compliance for 

compensation arrangements 

Section 409A of the Internal Revenue 

Code presents several compliance 

issues over which the Compensation 

Committee should exercise oversight. 

Have the company’s deferred 

compensation plans and 

arrangements been amended for 

Code section 409A If not, what is 

the timetable to do so The Internal 

Revenue Service extended the deadline 

to December 31, 2008 for employers 

to amend deferred compensation 

documents for compliance with Code 

section 409A. However, all such 

deferred compensation arrangements 

must comply in operation currently. 

Does the company have in place 

a procedure to identify those “key 

employees” each year who would 

be subject to the six month delay in 

payment of deferred compensation 

that becomes payable because 

of termination of employment 

Section 409A requires that ‘key 

employees’ of public companies incur 

a six month delay in receiving any 

deferred compensation arising from 

termination of employment. 

Does the company’s HR department 

have the appropriate safeguards and 

knowledge of the Code Section 409A 

rules involving separation pay and 

the prohibition against acceleration 

of deferred compensation payments 

to prevent inadvertent violations 

While a departing executive and 

his or her employer typically prefer 

to resolve all issues, including 

compensation issues, at the time 

of separation, caution should be 

exercised to prevent negotiated 

agreements from violating Code 

section 409A. That section and 

its regulations generally prohibit 

acceleration of deferred compensation 

to be paid in the future but have some 

complicated separation pay exceptions 

from the general rule. A violation 

costs the executive a 20% penalty and 

may cost the company some penalty 

because of withholding obligations. 

Is the Compensation Discussion and 

Analysis for the next proxy being 

prepared with due consideration 

of the SEC staff’s observations 

published on October 9, 2007 

Do any documents need to be 

amended because of the IRS position 

that if a performance bonus may 

be paid without satisfaction of the 

performance goals on the executive’s 

termination ‘without cause’ or for 

‘good reason’ the arrangement will 

not be considered performance based 

compensation for Section 162(m) 

purposes Generally, section 162(m) 

limits the company’s deduction for 

compensation to an employee to 

$1,000,000; but subsection 162(m) 

(4)(C) provides that performance 

based compensation is not covered 

by that $1,000,000 limitation. Private 

Letter Ruling No. 200804004 states 

that the exception for performance 

based compensation under subsection 

162(m)(4)(C) does not apply if the 

bonus would be payable without 

satisfaction of the performance 

goals on the executive’s termination 

‘without cause’ or for ‘good reason’. 

Are policies in place to prevent back 

dating of options Has there been 

an audit or inquiry to verify this 

problem has not occurred 

In the course of determining 

severance pay packages for 

executives, have comments in 

the Compensation Discussion 

and Analysis on compensation 

at termination been reviewed 

and considered to avoid action 

inconsistent with prior disclosures 

The SEC staff’s observations pointed 

out that decisions on compensation 

in change of control or termination 

agreements were required to be 

discussed and analyzed in the 

Compensation Discussion and 

Analysis. This requirement springs 

from the SEC compensation 

disclosure rule requiring disclosures 

regarding the amount of pay for each 

compensation element. Companies 

should be careful to review those 

disclosures at the time of an 

executive’s termination so that new 

decisions do not make the prior 

disclosures inaccurate. 

A brief gaze into the crystal ball 

On December 21, 2007, the SEC 

launched an online tool—called 

Executive Compensation Reader— 

which helps the world see the amount 

of compensation paid to the 

(continued on page 34) 


The Evolution of the Compensation Committee 

By Donald P. Delves 

Greater clarity, improved consistency and a firmer commitment. 

Corporate 

America 

is entering 

a new era of 

higher-quality 

corporate 

governance, 

bringing boards 

of directors 

Donald P. Delves to a new level 

of responsibility and accountability 

to shareholders and other key 

stakeholders. The catalyst for this 

change has not been just Sarbanes- 

Oxley, the Enron debacle, or new 

accounting rules for stock options, 

although each has had some influence. 

Rather, boards of directors of publicly 

traded companies, in general, are just 

plain doing a better job. 

What began with greater scrutiny by 

audit committees has now moved to 

compensation. Today, compensation 

committees at most public companies 

have greater clarity in their roles and 

responsibilities, improved consistency 

in sequencing of key decisions, and 

a firmer commitment to pay-forperformance 

principles. The result 

is more evolved, forward-looking 

compensation committees that are 

purposefully aligned with companies’ 

strategic goals. 

More independence, 

greater scrutiny 

Changes in the composition of 

compensation committees reflect 

Sarbanes-Oxley requirements for 

fully independent directors who are 

no longer the “chairman’s friends,” 

but who must be nominated by 

an independent committee. Since 

Sarbanes-Oxley was enacted in 2002, 

boards have seen a new generation of 

directors who were not handpicked 

by the CEO, but rather were chosen 

through an independent selection 

process. As a result, compensation 

committees are more willing to 

undertake thorough research and 

engage in meaningful discussion 

about the right performance 

measures, goal-setting processes, 

annual incentive design, and longterm 

incentive vehicles. 

A high-growth restaurant chain, 

for example, has professionalized 

its compensation committee by 

adding high-quality independent 

board members who have significant 

human resources experience. This 

has resulted in a complete rethinking 

of the company’s compensation 

philosophy and long-term incentive 

design. A stronger partnership 

between the compensation committee 

and management has emerged: The 

committee provides high-quality 

tools for enhancing performance to 

help the company continue to fuel its 

outstanding growth. 

Another change in the composition 

and functioning of the compensation 

committee has been improved 

partnering with the audit committee. 

It has become a best practice among 

boards to have one member of the 

audit committee also serve on the 

compensation committee. This helps 

to promote greater effectiveness in 

establishing performance measures and 

evaluating financial results to determine 

if goals were, indeed, achieved. 

Consistency and key decisions 

The makeup of the compensation 

committee, while significant, is far 

from the only change contributing 

to its evolution. Compensation 

committees have also established good, 

consistent calendars and agendas to 

sequence their key decisions, which 

sets the timing for the data sets and 

key analyses that they need. 

For example, in one large consumer 

products company, the Committee 

sees management’s estimates of 

performance for the year and payouts 

for bonus plans in November. In 

January, the final performance for the 

year and bonus payout calculations 

are presented. In March, the final 

bonus awards and annual long-term 

incentive grants are made. In August, 

the competitive compensation analysis 

prepared by management or the 

committee’s consultant is presented 

and the compensation philosophy is 

reviewed. In September, the benefit 

plans and perquisites are revisited, 

and so forth. With clear and consistent 

calendars and agendas, committees 

can be more systematic, methodical 

and thoughtful in their approach. 

Boards have also established “rules 

of the road”—clear guidelines for 

dealing with “unforeseen” events and 

special circumstances in advance of 

their occurrence. These may include 

acquisitions, divestitures, foreign 

currency fluctuations, and economic, 

climatic, or geopolitical disasters. 

Although impossible to predict, given 

the scope and complexity of a large 

company’s operations, unforeseen 


With clear and consistent calendars and agendas, 

committees can be more systematic, methodical and 

thoughtful in their approach. 

events of one type or the other are to 

be expected each year. 

With clearly defined “rules of the 

road,” boards establish policies ahead 

of time so that when the unexpected 

occurs, it is still business-as-usual. If 

currency fluctuations in Asia result 

in earnings per share (EPS) being 

affected, the compensation committee 

has already agreed with management 

on how it will be reflected in bonus 

calculations. The Committee does 

not get bogged down in unnecessary 

debates, and can spend its valuable 

time on more important matters. 

By making their jobs simpler and 

easier, compensation committees are 

able undertake other responsibilities 

that, historically, have been neglected 

by boards; for example, succession 

planning. Interestingly, poor 

succession planning in the past has 

been one of the biggest contributors to 

excessive CEO pay, since companies 

often have to pay more when they 

recruit outside candidates. 

Evidence of evolution 

The evolution of the compensation 

committee is evidenced by committees 

taking more time to address critical 

forward-looking issues that had been 

neglected in the past. For example: 

• At a large consumer packaged 

goods company, the compensation 

committee has been working hard 

to achieve alignment and mutual 

understanding of performance 

measures. Using tools such as 

cascading, integrated, well-defined 

MBOs (management by objectives), 

goal-setting processes, and rules 

of the road, the committee has 

streamlined its compensation duties 

and now has more time available 

to spend on effective review of the 

senior management team and indepth 

succession planning. 

As one board member observed, 

“It’s been great to have resolved 

our historic misunderstandings 

and disputes over how to measure 

performance. We now understand 

each other much better and are 

doing a better job of working with 

management on evaluating the 

senior management team.” 

• The compensation committee of 

a large retail company is finding 

more time to focus on measuring, 

promoting, and rewarding 

innovation throughout the company. 

As this example illustrates, 

compensation committees are 

breaking from their historic jobs of 

paying for the past (since most of 

compensation is based on what has 

already been achieved) and focusing 

more on the future (which is what 

shareholders are buying). 

The forward view 

Compensation committees in 

general are taking a more forward 

view to determine how companies’ 

strategies—including the key elements 

that will drive future growth—are 

reflected in compensation plans. 

There are numerous examples 

of how this forward-view is 

contributing to the evolving role of the 

compensation committee. At a semiconductor 

company, it has sparked 

a debate between the CEO and the 

compensation committee around 

how long-term incentive vehicles, 

performance measures, and goals are 

tied precisely to the company’s threeto 

five-year strategic plan. 

At another technology company 

where a new CEO was recruited from 

outside the firm, the compensation 

committee built ambitious goals 

into the CEO’s new-hire package. 

Now, the CEO is working with the 

compensation committee to make 

sure those same strategic challenges 

are built into the compensation 

system for all his direct reports. 

The greater depth and breadth 

of compensation committees’ 

responsibilities and improved 

alignment with corporate strategies 

reflects just how far we’ve come in 

the evolutionary process. However, we 

can’t become self-congratulatory or rest 

on our laurels to the point that we stop 

here. Although the quality and caliber 

of corporate governance has improved 

dramatically in the past five years, it 

is absolutely critical that we see the 

evolution of boards and committees as 

continuing processing that will go on 

for at least another ten to fifteen years. 

My vision is that in the years to come 

we will enter another era, beyond 

today’s higher level of corporate 

governance. In the next fifteen to 

twenty years, the role of the board 

and the compensation committee 

will evolve beyond just serving 

shareholders—to serving humanity. 

Donald P. Delves is the president and founder of The 

Delves Group, a Chicago-based executive compensation 

and corporate governance consulting firm (www. 

delvesgroup.com.). Delves is also the author of Stock 

Options and the New Rules of Corporate Accountability: 

Measuring, Managing and Rewarding Executive 

Performance (McGraw-Hill 2003; WorldatWork,2006), 

and Accounting for Compensation Arrangements 

(Commerce Clearing House, 2006, 2007, 2008). Delves 

is a Certified Public Accountant and graduate of the 

University of Chicago Graduate School of Business. 


Closing Keynote: 

The Compensation Committee’s Evolving Agenda 

By Gary Locke and Paula Todd 

In the year ahead, many compensation committees are likely to focus more closely on 

fine-tuning pay programs and carefully analyzing current arrangements. 

While 

most 

compensation 

committees 

appear to have 

made the initial 

adjustment 

to today’s 

governance 

Gary Locke environment, 

including 

enhanced proxy 

disclosures, 

it’s clear that 

committee 

members 

continue to 

take “life in 

the fishbowl” 

seriously. 

Paula Todd 

At many 

companies, compensation committee 

meetings have become more frequent 

and rigorous, and committee 

discussions have become increasingly 

probing and critical. In short, 

committee members are more sensitive 

to shareholders, more involved in 

compensation program design and 

more concerned about the “optics” of 

executive rewards than ever before. 

This is the picture that emerges from 

our recent scan of the mood among 

members of compensation committees 

at major global companies in 2008, 

based on interviews with 25 senior 

Towers Perrin consultants in the U.S., 

Canada and Europe. On average, 

the consultants interviewed each 

have about 20 years of consulting 

experience and collectively represent 

board relationships with over 350 

companies, including many of the 

largest publicly traded companies in 

the world. 

Our recent scan suggests that most 

boards have now addressed and 

moved on from some of the top issues 

they faced in recent years, such as the 

compensation committee’s role and 

charter, how to construct and use tally 

sheets, reducing stock plan dilution 

and how to structure pay for outside 

directors to reflect emerging demands 

of their role. The governance and 

compliance changes that dominated 

the agenda in the wake of Sarbanes- 

Oxley and FAS 123(R) are now largely 

behind them, although the new 

proxy disclosure rules remain top of 

mind because of the broad window 

they’ve opened into the rationale and 

processes boards follow in making 

decisions about executive pay. 

In the year ahead, the agenda for 

many committees is likely to focus 

more closely on fine-tuning pay 

programs and carefully analyzing 

current arrangements to ensure that 

incentives and other programs truly 

align with the creation of shareholder 

value and are fully transparent—and, 

ultimately, defensible—in today’s 

environment of full disclosure. Here’s 

a rundown of what are likely to be the 

issues at the top of the compensation 

committee agenda in the coming year: 

Selection and calibration of 

performance measures 

In an accelerating shift, committees’ 

traditional focus on “how much” 

incentive programs deliver is giving 

way to an even closer consideration 

of “for what.” Expect committees to 

devote more attention to selecting 

appropriate measures for both shortand 

long-term incentives, thinking 

about performance sensitivity, 

reconsidering thresholds and targets, 

and modeling performance outcomes. 

Many committees will want to 

consider plan design alternatives to 

make incentives even more sensitive 

to key performance metrics. 

Evaluating management’s 

performance 

A closely related consideration is the 

question of how company executives 

are actually performing relative to the 

targets. The most burning issue for 

many committees today is whether 

executive performance actually 

justifies the payouts being reported. 

Committees do not want to provide 

generous pay for mediocre results and 

are extremely conscious of how things 

might look in the proxy statement. 

There’s also growing interest in 

understanding shareholders’ and 

financial analysts’ perspectives 

when evaluating management’s 

performance and looking at pay 

and performance from a multi-year 

perspective. 

Succession planning/talent 

management 

This issue has become a high priority 

for most committees. CEO turnover 

is at record levels, as CEOs who fail 

to perform are shown the door more 


quickly than ever before. Committee 

members today have become acutely 

aware of the risks of not having a 

groomed and ready successor in place, 

and some are playing active roles with 

regard to succession below the CEO 

level. Directors increasingly want their 

companies to be rich in executive 

talent and are investing more time 

in trying to build a deeper bench of 

management expertise across multiple 

disciplines. 

Rationalizing sign-on and 

exit packages 

When boards need to reach outside 

for new leaders, compensation 

committees often struggle to design 

hiring packages that balance the 

need to attract top talent in a highly 

competitive market with the growing 

pressure to avoid “giving away the 

store” in the event of failure. They 

usually have few concerns about 

offering considerable upside potential. 

But what happens if things don’t 

work out Relatively few successful 

executives are likely to leave a stable 

employment relationship without 

considerable protection against 

downside risk, in the form of hiring 

or guaranteed bonuses, severance and 

change-in-control protection. Many 

boards feel like they’re between a 

rock and a hard place with regard to 

severance and parachute programs. 

Ultimately, committees will need to 

satisfy themselves (and be prepared to 

explain) that whatever programs they 

adopt are necessary to attract and 

retain key talent and do not constitute 

an unjustified entitlement. 

Rationalizing other 

programs not directly 

linked to performance 

The new disclosure rules have also 

brought heightened visibility of 

supplemental executive retirement 

programs (SERPs) and perquisites. 

Over the past few years, many 

committees have gotten a taste of 

what’s involved in scrutinizing—and 

either cutting back or justifying—their 

perquisites. In the coming year, we 

expect growing focus on bigger-ticket 

items like SERPs. While we don’t 

expect wholesale changes in executive 

retirement plans, some incremental 

movement is possible, especially by 

companies with the richest programs. 

For example, changes might take the 

form of freezing or reducing future 

SERP accruals or cutting back benefit 

subsidies. 

Compensation philosophy 

Consistent with their concerns about 

the optics of large payouts and the 

need to clearly articulate a defensible 

rationale for pay decisions, many 

compensation committees will revisit 

their executive pay philosophies this 

year—to be sure they’ve got the right 

forms of pay and the right degree of 

rigor in their performance targets 

and pay delivery. Some committees 

are asking whether certain programs 

and recent decisions now merit 

reconsideration. For example, was 

jumping on the restricted stock 

bandwagon the right thing to do Pay 

philosophies will get more attention 

at companies that target their pay to 

be above-market and at those that 

have traditionally emphasized nonperformance-based 

rewards in the 

overall mix. 

Use of benchmarking and 

selection of peer groups 

In recent years, some critics of 

executive pay have contended 

that benchmarking pay practices 

contribute to an upward “ratcheting” 

of pay levels (e.g., via the selection of 

inappropriate “peer” groups to help 

inflate market pay practices and the 

use of multiple peer groups to “cherry 

pick” the outcome). Our recent board 

scan suggests that, while today’s 

compensation committees still have 

a healthy interest in understanding 

the market for executive pay, they 

use benchmarking as only one part 

of a bigger process. It’s also clear that 

some committees continue to struggle 

with selecting appropriate peer groups 

for analysis, and some look to multiple 

groups of peers to ensure the proper 

context for their decisions. The market 

for executive talent can be complex, 

and most compensation committees 

want to know the complete picture— 

even if it isn’t a simple one. 

The corporate governance 

environment 

While many boards have moved 

beyond their recent inward focus on 

board operations and committee roles 

and charters, this is not to say that 

governance issues have faded from 

view entirely. Shareholder proposals 

on pay remain top of mind for some 

committees, while the “say on pay” 

legislation under consideration in 

Washington continues to concern 

many committee members. Overall, 

however, the coming year is likely to 

be marked by an emphasis on better 

committee processes and decisionmaking. 

For most compensation 

committees, “getting pay right” has 

taken center stage. 

Gary M. Locke is a managing director and leader 

of Towers Perrin’s Executive Compensation and 

Rewards business. A member of Towers Perrin’s 

board of directors, Locke advises management and 

boards of leading public and private companies 

on executive and director compensation strategies 

and plan design. Paula H. Todd is a managing 

principal in Towers Perrin’s Stamford, CT, office and 

serves as a firmwide technical resource on issues 

including corporate governance, proxy disclosure, 

the design of stock-based incentives and executive 

employment arrangements. She frequently speaks 

and writes about these topics. The authors can be 

contacted at gary.locke@towersperrin.com and 

paula.todd@towersperrin.com. 


Spiedel & Surdel, from page 27 

still (about 7%) provide additional 

equity compensation to Lead 

Directors, for a median additional 

value of $30,000. 

Total direct compensation is a 

measure of all cash compensation 

(retainers and fees), plus all annual 

equity compensation for the past 

fiscal year. Median total direct 

compensation was $140,600 last 

year for high-tech company board 

members, compared to $211,200 in 

total direct compensation for S&P 

board members. 

Increasingly, companies and investors 

are looking at the aggregate cost of 

director compensation relative to 

revenue, market cap and other key 

metrics. In our analysis, the range 

of aggregate board costs was quite 

high—more than 2x—and the median 

aggregate cost was $933,535. This 

represented 0.20% of last fiscal year 

revenue and 0.08% of last fiscal year 

end market cap. We expect companies 

to draw comparison of their aggregate 

board cost to their peers in the future 

as another benchmark to determine 

program reasonableness. 

Edward J. Speidel is senior vice president, Radford 

Surveys + Consulting (an Aon Consulting Company). 

Previously, he was principal and national executive 

compensation practice leader for Mellon Human 

Resources & Investor Solutions (formerly Buck 

Consultants) and managing director of the Northeast 

compensation practice for PricewaterhouseCoopers. 

He earned a BA in economics/government from 

University of Delaware, an MBA from Lehigh 

University, a JD from the New England School of 

Law, and a master of laws in taxation from Boston 

University School of Law. In addition, he is a certified 

compensation; benefits; and equity professional, 

respectively. 

Robert Surdel is assistant vice president, Radford 

Surveys + Consulting. He previously held consulting 

positions at Pearl Meyer & Partners, Buck Consultants 

and iQuantic. He holds a BA in economics and 

environment sciences from Bowdoin College, 

graduating cum laude, and is currently pursuing an 

MBA from Babson College. Rob holds the Certified 

Compensation Professional (CCP) and Global 

Remuneration Professional (GRP) designations. 

Ahern, from page 29 

executives at 500 of America’s 

largest public corporations. This 

tool also permits comparisons of 

compensation between different 

companies. The information can be 

located and reviewed quickly with 

a few computer clicks rather than 

wading through pages of proxies. 

In this information age, where the 

availability of information spawns new 

movements and energizes others, some 

reflection may be in order over how 

the increased attention on executive 

compensation from Washington may 

affect public companies and their 

compensation packages. 

The SEC’s launch of this online tool is 

just part of the current ‘open season’ 

on executive compensation. Other 

events in this season are the SEC staff’s 

extensive review and comments on 

disclosures made in the Compensation 

Discussions and Analysis segments in 

proxies, and Congressman Waxman’s 

congressional inquiry on compensation 

consultants and their impact on 

executive compensation. All of these 

activities should be viewed as part 

of the movement in today’s society 

Perhaps free agency in professional sports is a simple 

and helpful analogy for defending large executive 

compensation packages in the public forum. 

against large compensation packages 

for corporate executives. 

Decisions to center the spotlight 

on executive compensation are 

not driven by investment analysis 

needs. In Benjamin Graham’s classic, 

The Intelligent Investor, the topic of 

executive compensation is not a 

material factor in analyzing a company 

for investment purposes. The SEC 

staff’s pressure for better explanations 

of why and how various factors 

affected compensation decisions will 

not fill any significant void in material 

information desired by investors. 

Washington’s focus is about politics, 

as it almost always is. If so viewed, 

the Compensation Committee must 

be sensitive to the realities that 

compensation of executive officers will 

receive close scrutiny and may have to 

be persuasively defended in the public 

forum. Whenever a large severance 

package for a CEO is announced, there 

is an outburst of adverse publicity and 

criticism. 

Perhaps free agency in professional 

sports is a simple and helpful 

analogy for defending large executive 

compensation packages in the public 

forum. Certain professional athletes 

command significant compensation 

for their talents because their past 

performances have demonstrated an 

ability to excel and there is competing 

interest for their skills. Particular 

executives too can command 

substantial compensation for the same 

reasons as successful athletes. 

Terrence Ahern, a partner with the law firm of 

Stinson Morrison Hecker LLP, has more than 30 

years experience advising businesses regarding 

the establishment, operation and termination of 

employee benefit plans. 


© 2007 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. 

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