Break the mold on director pay.

• Author: Kuhns, James A.

At no other time in recent memory have boards of directors been subjected to such intense public, regulatory, and government scrutiny, as exemplified by the recent SEC action on executive compensation disclosure requirements. Shareholders and institutional investors, who have been a board's traditional constituencies, are increasingly active, vociferous in their demands, and more apt to seek recourse if those demands are not met. And a number of expanded constituencies - employees, management, customers, the community, and society at large - continue to emerge and require increasing attention.

But that's not all. As the business environment for most companies becomes more complex, with issues such as industry consolidations, global competition, escalating technology, capital needs, and restructuring opportunities, board members are under increasing pressure to assume a more dynamic role in the governance of their companies.

In response to this atmosphere of increasing scrutiny and complexity, boards of directors are becoming more involved in setting their companies' strategic direction and objectives than they have been in the past. Directors have redefined their criteria for success to be more committed to the company, to oversee its strategic and organizational direction, and to define acceptable company performance.

Little wonder then that potential directors are more selective than ever about the companies they will serve. Many companies haven't helped matters by maintaining a director compensation system that does not reflect directors' current efforts, responsibilities, and accountabilities - contributions that increasingly determine the board's requisite qualifications and how they will operate.

An effective director compensation system properly rewards directors for what they actually do based on the necessary qualifications for board members, and by clearly identifying the type of role the board plays in the company. With the right approach, compensation can be a powerful and effective tool to attract and retain qualified directors - and to reinforce behaviors that are in the best interest of the company.

The board's more strategic nature will be the basis for a new approach to director pay. The roles, risks, and exposure for corporate boards of directors vary, and these variations should be reflected in the qualifications of an effective director.

Nine Decisive Factors

The following nine factors, weighted by priority, can help companies determine the necessary qualifications for their directors and how the complexity of their situations will affect director compensation. By evaluating the company's position based on specific business needs relative to each of these factors, a company can determine how qualified and involved its board must be, as well as how its compensation levels should compare with other companies.

For purposes of illustration, we'll compare the board of directors of MacKey Industries, a food products company with $500 million in revenue, with the board of Byte Technologies, a $100 million high technology company. Each company requires different qualifications and levels of involvement from its board. These two companies should, as a result of these differences, pay their boards of directors very differently. (These...