The Advisors' Blog

– Subodh Mishra, ISS Governance Exchange

Director age and term limits have been in sharp focus over recent months, particularly as campaigners for greater board diversity seek to promote limits as one means of ensuring avenues to the boardroom for female and minority candidates. Proponents of term limits also contend such policies serve to address concerns over the potential for directors to be co-opted by management by virtue of lengthy stints on a given board. Critics, meanwhile, argue age or terms limits would result in the loss of otherwise well qualified directors whose “long view” can help drive businesses forward.

Against this backdrop though favoring neither approach, ISS examined the affect of director age and tenure on CEO pay (see below for methodology of the analysis) over the course of fiscal years 2009, 2010, and 2011 (as reported in 2012), to identify associational trends between director characteristics and higher levels of CEO pay.

What We Found
– As reported in 2012, older directors were associated with higher levels of total CEO pay at large capital firms paying, on average, 31 percent more than younger counterparts, and 59 percent more than large capital firms broadly.
– Driving the wedge between CEO pay tied to older versus younger directors is the value of bonus and restricted stock awards, with older directors paying 32 and 54 percent more, respectively.
– With regard to tenure, less tenured directors are associated with higher levels of total CEO pay, awarding, on average, $14.9 million reported in 2012, or 6 percent more than more tenured directors.
– Over the three years studied, less tenured directors paid their CEO more in the way of salary, bonus, “all other pay” (such as exit pay and perquisites), and stock options, while more tenured directors paid more in just one category evaluated: stock awards.
– Over the three years studied, the prevalence of older directors was most pronounced at study companies in the Energy sector (57 percent of directors above the median age), followed by Health Care (54 percent) and materials (51 percent).
– Telecommunication Services at 30 percent, and Information Technology at 34 percent, showed the most underrepresentation of older directors.
– Utilities sector directors tend to be the longest tenured with 61 percent of such study company boards sitting above the age median across all sectors, with Telecommunication Services at the other end at 30 percent.

What We Looked At
The analysis examined levels of total direct compensation and various underlying pay elements for CEOs at S&P 500 companies in fiscal 2009, 2010, and 2011 (as reported in 2012). Pay data are drawn from ISS’ proprietary ExecComp Analytics database. The analysis evaluated CEO pay levels vis-à-vis average director age and tenure by company, with the study group split between those above and below the median for the study universe.

To arrive at the study universe, we controlled for companies without a fully independent compensation committee, those with CEO pay outliers (e.g., Apple CEO Tim Cooks $377 million pay for fiscal 2011, former Citigroup head Vikram Pandit’s $1 pay in 2009, etc.), and, with regard to performance, removed companies where three-year total shareholder return (TSR) fell below the median.

Accounting for the above, the study universe of S&P 500 companies was reduced to and finalized at 230 in fiscal 2009, 231 in fiscal 2010, and 215 for fiscal 2011.

Total direct compensation was defined as the sum of pay received from: base salary, bonus, non-equity incentive plan compensation, stock awards, option awards, change in pension value and nonqualified deferred compensation earnings, and all other compensation, such as perquisites. The calculation generally matches corporate Summary Compensation Table with the exception of the stock option value, the calculus for which can be found here.

Note that for purposes of this analysis we’ve combined bonus and non-equity incentive payments–i.e., all non-salary cash awards–under the label of bonus. Take a look at the underlying summary data on ISS’ Governance Exchange.