"Executives have always known that you'll never get rich from a salary. You'll get rich from stock options."

Consultant Mae Lon Ding

 "More Firms Put Directors in Shareholders' Shoes"

Beth Silver, Chicago Tribune Staff Writer

Consultant Mae Lon Ding, Aug 1994

More and more members of corporate boards are finding that direct pay is limited but that compensation is being tied to such incentives as stock options and retirement plans.  A recent study by the accounting firm Coopers & Lybrand found that of 250 companies surveyed, about one-third are enticing potential directors with stock in the company.  Five years ago, most companies did not offer stock options to directors, said Michael I. Lew, Coopers & Lybrand regional director of compensation consulting.  Mae Lon Ding, a benefits consultant and owner of Personnel Systems Associates in Tustin, Calif., said such alternative pay will become the compensation of the future because it offers tax advantages.  "Executives have always know that you'll never get rich from a salary. You'll get rich from stock options," Ding said.

But Edward Zajac, professor of organization behavior at the Kellogg Graduate School of Management at Northwestern University, said giving directors stock options- which many executives are getting, too- may not be a pay raise.  "It's a symbolic prospect, and it's truly for the outside world," he said, adding that linking the compensation of directors to performance of a company's stock gives directors an air of accountability.  Although Zajac said he had no numbers on the usual value of the stock compensation, it generally is not enough to make a difference to a director who takes in a large salary from other duties.

However, the trend to put directors in the same position as stockholders can only mean positive change for the companies they manage, said Steven Kaplan, a finance professor at the University of Chicago Graduate School of Business.  "It's saying,'We care about the stock price, and we want you to care about the stock price,'" Kaplan said.  Managing a company for short-term stock price appreciation isn't a problem with the use of options, because directors who stay on a board for an average term of two to three years eventually will be haunted by bad short-term decisions, Kaplan said.  Ding agreed, saying there are safeguards a company can put in, such as a holding requirement that keeps the board member from selling his or her stock for a number of years.  "Clearly, the consultant who designs a pay plan should be thinking about these kinds of issues so that the board member is rewarded for long term thinking," she said.

Kaplan said stock options and retirement plans are ways to make directors' salaries look lower to a company's stockholders.  A $25,000 fee is "peanuts" to a chief executive whose time is limited and whose salary is substantial, he said; so retirement plans and stock options could make a difference in hiring that executive to become a director at another company.   Retirement plans usually pay directors a retainer fee for as many years as they serve on the board, Lew said.  "It's clearer because it is basically a way to increase the pay without formally increasing it," Kaplan said. 'it's essentially a payoff down the road."

In addition to an average $15,300 annual retainer fee, directors receive an average fee of $1,100 a meeting. They generally attend six meetings and three subcommittee meetings, at $750 apiece, each year, according to the Coopers & Lybrand study. Total average pay is $24,150.  "Some time ago, it may have been viewed as a friendly club," Lew said. However, it is not that way today. The economic and legal environments today make it necessary for every director to prepare well, to ask the right questions, to be aware."

Kaplan said added compensation is needed because directors now are putting in 10 percent more time than they did a few years ago. The survey found directors work an average of 76 hours a year.  Directors are putting in more time because shareholders are placing greater pressure on them to monitor management than they did a decade ago, he said.

The survey also found that women and minorities still lag far behind white males in representation on corporate boards.   Women hold only 7 percent of the total positions. Overall, 96 percent of directors are white, and 89 percent are older than 45, the survey found, while 58 percent are older than 55.  On large boards, such as those common in the health care industry, women fill 13 percent of directorships. 

The survey found that an average board has 10 members, with health care corporations at 21 and construction companies at seven.   Zajac said large corporations are more sensitive to hiring minorities and women. Smaller firms seek specialized experts to advise their companies, he said.  Lew said companies often are looking to fill directorships with a chief executive or financial officer of another company, diminishing the pool of available women and minorities.

He added that the findings of the survey reflect small numbers of available older women and minority top executives, indicating that their low representation on boards isn't necessarily the result of discrimination. Recruiting for boards primarily is done through recommendations from the chairman or other board members, the survey found.  "As we see women and minorities move up into senior executive ranks across industry, we will also see them occupy more and more directors' chairs," Lew said.

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