April 29, 2011
Director Pay: Are Boards Really Shy About Giving Themselves a Raise?
– Broc Romanek, CompensationStandards.com
Recently, TK Kerstetter of Corporate Board Member expressed his opinion that directors are underpaid. Earlier this week, he wrote this blog entitled “Directors Still Shy About Giving Themselves Raises.” I’m not sure where TK is getting his data from, but we haven’t seen any studies for this proxy season yet as the proxy disclosures are just rolling in now – and the data from last year (comparing 2010 to 2009 levels) revealed that boards received double digit (11%) raises on average when comparing total values of director compensation. That surely isn’t bad in a poor economy – and I predict the 2010-2011 comparison will also reveal a significant move upwards. [My data is pulled from Frederic W. Cook & Co.’s latest report on director compensation that compares the Nasdaq 100 vs. NYSE 100 for 2010.]
As reflected in TK’s blog, some argue that boards are doing more now so their pay levels should be adjusted upwards. But that doesn’t take into account that boards likely were overpaid in the past – so perhaps now they are finally earning what they make. $228,00 per year for a very part-time job isn’t bad (this is the median amount for 2010 noted in the Cook report). Go back a decade and talk to anyone who spent significant time in the boardroom and you’ll hear plenty of stories about how boards did very little before the advent of governance reforms and shareholder pressures directed towards them since the turn of the century. Consider that only a handful of companies had written procedures & policies (ie. corporate governance guidelines) about how their boards operate a decade ago. That says a lot about how seriously many boards took their role back then in my opinion.
And I strongly urge boards not to fall into the trap of relying solely on peer group studies to determine how much they should pay themselves. This would be repeating history as this type of benchmarking is one of the major causes of excessive CEO pay – the slippery slope upwards as everyone wants to be paid in the top quartile (who would say “we are a bad board and so should be paid at the bottom”?). Not to mention all the other perils of peer benchmarking, such as manipulating the data (as noted in the recent study). Common sense needs to prevail. Boards don’t need raises because “everyone else is doing it” without considering the sizable amounts they already earn for the fairly limited tasks they perform.