The Advisors' Blog

– Noah Kaplan, Frederic W. Cook & Co.

After significant increases in outside director pay in the years following Sarbanes-Oxley, last year’s study saw compensation levels stabilizing. This year’s study finds that companies’ approach to delivering compensation to outside directors has remained consistent.

While competitive cash compensation levels are largely unchanged in the past year, sharp declines in the equities markets impacted the value of outside director compensation programs, particularly at the NASDAQ companies where fixed-share equity grants are more prevalent. Median annual compensation for basic board service increased modestly at the NYSE companies, but declined at the NASDAQ companies. For the first time in the seven years that Frederic W Cook & Co. has conducted its annual study of outside director compensation, median compensation for directors at the 100 largest NYSE companies exceeded that provided by the 100 largest NASDAQ companies.

New to this year’s report is an analysis on the prevalence of mandatory retirement policies for outside directors. Additional details on annualized equity award values are also provided. Some notable findings and trends are:

– The median total value of director compensation for all companies in the study declined by 3% from 2008 levels. A slight increase in median value for the NYSE companies (+4%) was offset by a substantial decline in the median value for the NASDAQ companies (-14%). Year-over-year comparisons of the total value of director compensation programs reflect changes in cash compensation, equity grant levels, stock prices, binomial ratios (for companies granting options) and pay mix (as well as changes in the study sample).

– Overall, Board member cash compensation increased slightly at the median since last year’s study ($75,000 versus $70,000), driven by a slight increase at the NASDAQ companies. The prevalence and median values of board member cash retainers and board meeting fees did not change meaningfully. Overall, median Board member cash compensation is significantly higher at the NYSE companies ($80,000) than at the NASDAQ companies ($57,000).

– Following the trend from recent years, companies continued to move director equity awards out of stock options and into stock awards. Stock awards are used exclusively by 77% of the NYSE companies and by 37% of the NASDAQ companies (compared to 65% and 31%, respectively, last year). Options are used exclusively by only 5% of the NYSE companies and only 23% of the NASDAQ companies (compared to 8% and 32%, respectively, last year).

– The sharp decline in the equities markets in the 12 months ending March 31, 2009 had a significant impact on equity award values at those companies denominating awards on a fixed-share basis. At the NASDAQ companies, where fixed-share awards are more prevalent, median annualized equity value declined by 28%. At the NYSE companies, where equity awards are usually expressed as a dollar value, median annual equity value increased by 4%. Overall, annualized equity compensation values at the NASDAQ and NYSE companies are essentially equal ($126,685 at the NASDAQ companies versus $125,000 at the NYSE companies). This is a dramatic change from last year’s study when the NASDAQ companies granted 46% more in annualized equity value at the median than the NYSE companies.