Equal Pay for All Directors? - Brief Article

Chief Executive, The, May, 2001 by Robert Lear

Traditionally, all outside directors receive substantially the same compensation for serving on a corporate board--the prestigious CEO of another company, the first-time director, the long-term mentor to the CEO, the college professor, the distinguished scientist, the worker, the shirker--they all get paid about the same. I say "about," because a number of companies pay the chairmen of the major committees--and sometimes the members--an extra $2,000 to $3,000, but it's seldom more than $5,000. In certain cases where a non-executive chairman is in force, a substantial retainer fee may be paid, but these are few and hard to find.

The justification for this "equal pay for unequal contribution" dates back to the days when board work was considered an honorary position and most of the outside directors were persons of considerable wealth or income. The duties of the director were not onerous and the $100 gold pieces paid for board attendance were sometimes flipped at a line after the meeting.

Now, it's not unusual for the leading corporations to pay their outside directors more than $100,000 in cash and/or stock equivalents. Further, many corporations of all sizes issue stock options to their directors. Today, the income an outside director receives is a significant factor in deciding which board offers he or she chooses to accept.

Just as the compensation of outside directors has risen over the years, the job of the director has become more complicated and sophisticated. It requires more talent and experience and takes a great deal more time. This is particularly true in the following three cases:

Chairman of the audit committee: This individual should have a broad financial or accounting background and should be a senior, respected director. With the new S.E.C. audit responsibilities now being advocated, this post involves expertise and hard work. Few people have sufficient qualifications.

Chairman of the compensation committee: This individual has an increasingly complex task. He or she must understand the intricacies of the executive compensation programs of the company and the industry and be prepared to defend them, sometimes under high-profile circumstances. Again, this post requires special knowledge, experience, and time. Here again, also, qualified candidates are limited.

Chairman of the corporate governance committee: Although only two-thirds of our good-sized corporations have such a committee, the number is growing each year and so is the scope of the committee's job. The chairman usually supervises the recruitment and nomination of new directors, determines their compensation, and appoints members and chairmen of the board committees. He or she also coordinates the evaluation of the performance of the CEO, the board, and individual directors. Needless to say, this post is usually filled by one of the most senior and respected directors.

These three committee chairmen make up the core of the board's competency. They need to know more and work harder and be smarter than their fellow directors. They are sufficiently difficult to find and to develop that some boards are aggressively recruiting on the outside to find the right individuals to chair these important committees.

This is why I think a strong case can be made that they ought to be paid better for what they do. My suggestion is to pay these three committee chairmen twice the retainer fee and twice the committee attendance fee in both cash and stock equivalents.

Will this open Pandora's box for a reappraisal of all directors' compensation? Will companies be asked to pay them for their individual contributions, length of service, scarcity, or what-have-you? Will it get to be like professional athletic teams where each director negotiates his or her own salary every year?

I don't think so. We already have plenty of precedents for paying major committee chairmen a small bonus; a doubling of the retainer fee is not going to be revolutionary or shocking. The name of the game is to get and keep superior executives performing these functions at your board, year in and year out. And when you get them, cherish them. They are priceless.

Formerly CEO of F.&M. Schaefer (1972-1977), Robert W. Lear is chairman of CE's advisory board. He taught at Columbia Business School, where he was executive- in-residence until June 1999. He has been a director of many companies and is on the advisory boards of five small firms. He is a partner of Lear, Yavitz and Associates corporate governance consultants.