Crafting the pay of non-CEO chairmen: with the number of non-CEO chairmen expected to increase, boards and compensation committees must arrive at a more complete understanding of how individuals in this role are paid.

• Author: Haggerty, Pat
• Position: COMPENSATION - Chief executive officer

NON-CEO CHAIRMAN PAY is one of the least studied topics in the executive compensation field. As more U.S. companies elect to separate the duties of the chairman of the board from those of the chief executive officer, boards will need to understand how chairman-only positions are paid. This article discusses the range of non-CEO chairman pay and its components, and details research into the duties, responsibilities, tenure and backgrounds of non-CEO chairs. (The accompanying box describes the methodology used to develop the market data.)

Chairman Background and Form of Pay

The most important indicator of non-CEO chair pay is whether the individual in the position is a former CEO or high-ranking executive of the company. Another important indicator is whether the individual is paid as an employee or a director. Given that, we have categorized non-CEO chairs into three categories:

* Executive chairmen are paid as employees and are in fact former employees of the same company, usually a former CEO. Some executive chairmen are also founders or relatives of founders.

* Nonexecutive chairmen receive director-type pay and are former employees of the same company, typically a former CEO. Some nonexecutive chairmen are also founders or relatives of founders.

* Independent chairmen receive director-type pay and typically have no former affiliation with the company, at least as an employee.

As Exhibit 1 shows, executive chairmen on average earn significantly more than their counterparts. Since they are still employees, they tend to participate in employee compensation programs such as short-term and long-term incentives, and may also continue to receive employee benefits. Most executive chairmen appear to maintain the same salary, incentive opportunity, and benefit coverage they had prior to dropping the CEO duties.

Nonexecutive chairmen and independent chairmen have a compensation package limited to additional board retainers and equity. While a few nonexecutive chair packages are sizeable, most are lower than those of executive chairmen.

The question arises of why some chairs who are former executives are paid as employees and some as directors. Extensive research provided no answer to that question. It did not show that executive chairmen have additional duties or devote more time to the company than nonexecutive or independent chairmen.

Executive Chairmen Compensation

As Exhibit 1 notes, the median total compensation for executive chairmen was $882,600 and the average was $2,139,900. Following are details:

* Base salaries range from one dollar to $1.8 million. Two individuals were in the one-dollar category. Both are in the technology industry; one is a company founder and the other is a significant shareholder.

* Seven individuals receive base salaries greater than or equal to $1 million.

* Although roughly two-thirds of executive chairmen were eligible to receive short-term and/or long-term incentives, fewer actually received an award. For those who received awards, the amounts are comparable to what chief executive officers generally receive. Details are in Exhibit 2.

As shown in Exhibit 3 (on next page), executive chairman pay appears to be influenced by company size and founder status. Individuals at companies with revenues greater than $4 billion (about the midpoint of the sample) make considerably more than those at companies smaller than $4 billion. In addition, founders earn more than non-founders, although it is unknown whether this is a result of being founders or owing to the sample of companies chosen. For example, in the nonexecutive chairmen sample, the results are reversed...