Excellent tools for compensation and alignment.

AuthorMarley, James E.
PositionCorporate director compensation - Response to Hoffer Kaback, Directors & Boards, Winter 1996

While Hoffer Kaback and I would appear to be on different sides of the fence on the board compensation issue, interestingly, I find myself agreeing with some of his conclusions, but for somewhat different reasons.

As a member of the NACD Commission on Director Compensation and a corporate director, I am a strong proponent of increasing the stock component of director compensation - although not an advocate of stock-only compensation for every company. NACD advocates for "significant ownership" with equity representing a substantial portion of the total director compensation package. We realized that prescribing a given ownership position for every board and every director - a "one size fits all" approach - simply doesn't work.

NACD's position on director compensation revolves around the idea that the interests of the board should be aligned with those whose interests it serves, namely, the shareholders. And, in fact, research indicates that shareholder wealth is greater in companies whose board members own relatively larger amounts of stock.

I would like to address a few points raised by Mr. Kaback's article:

* Stock compensation does not discourage good directors from service.

Stock compensation and ownership, when done voluntarily and tax-effectively, are excellent tools to deliver compensation and align directors and shareholders. Kaback argues that payment of director fees in stock imposes a tax liability without providing a cash income to pay the taxes. Clearly such a liability can be readily avoided by the creation of a deferred compensation plan that enables the director to have the cash fees invested in "phantom" shares of the company's stock.

* Stock-only compensation may limit the pool of quality directors.

Many corporations need to attract public-spirited board members who simply do not have the financial resources to invest in company stock. Such candidates should be...

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