Give directors restricted stock.

• Author: Lewis, Marcia
• Position: Director Compensation

The demands on directors are increasing. While heavier demands may justify higher fees, they do not necessarily translate into support for the trend to increase the complexity of directors' compensation.

As recently as the mid-1980s, directors' compensation typically consisted of a retainer, meeting fees, a deferral opportunity, and assorted perks. In the early 1980s, some companies adopted directors' pensions, arguing that the company would continue to reap the benefits of the retiring director's counsel well past retirement. Next, stock programs were developed, ostensibly to instill more of a shareholder perspective in directors, but more likely to deflect criticism of many directors' meager share ownership.

Now, some shareholders and their representatives are asking whether CEOs are using these plans to deflect board criticism of management pay.

Critics and supporters can agree that directors' compensation should reflect results achieved and responsibilities assumed. But there is no agreement on whether directors' pensions directly address these issues or if have they become a "me too" item in trendy compensation packages; if they are a needed compensation element in an increasingly competitive market for talented directors or a misuse of corporate funds.

Directors' pensions are a relatively recent phenomenon. From fewer than 10 in 1980, recent surveys show that a quarter of Fortune 500 companies had adopted such a plan by 1986 and over 40% had done so by 1991.

Pension plans provide some measure of retirement security in exchange for company service, with executives typically earning pensions of about 50% of final year compensation from their own companies. Since CEOs, COOs, and retired executives from other companies are the largest sources of outside directors, the question of whether additional retirement income is a cost effective addition to directors' compensation packages cannot be ignored.

In addition to pension plans, 40% of companies in 1991, up from 8% in 1986, also offer stock options or stock grants to outside directors, according to the most recent Korn/Ferry survey of boards of directors. While these plans are meant to increase director share ownership, shares may vest in as few as six months and there is typically no requirement that a director hold exercised shares.

It is open to question, then, whether current stock plans align director and shareholder interests or are just a risk-free add-on to fee compensation.

Can...