Revisiting the pay of the nonexecutive chair: analysis shows inconsistencies in compensation of executive and nonexecutive chairs.

• Author: Lerner, Diane
• Position: DIRECTOR COMPENSATION

FIFTEEN YEARS AGO, in 1994, we wrote an article for Directors & Boards titled "Paying The Separate Chairman." At the time, corporate governance efforts had been on the rise for U.S. public companies, and there was increased discussion about separating the CEO and chair roles.

This article is an update, looking at current compensation practices for non-CEO board leadership roles, including non-CEO chairs as well as the newer role of lead director. As with our 1994 article, we do not judge whether there should be a non-CEO chair or a lead director. Nevertheless, if companies are going to have these positions, the pay packages should be appropriate for the roles.

What we observed 15 years ago

These were the key findings of our 1994 article:

* There were very few examples of non-CEO chairs, and the pay data was very difficult to obtain. We ultimately pulled a sample of 34 companies.

* There were two types of non-CEO chairs: "inside chairs" (now referred to as executive chairs), who were paid like employees; and "outside chairs" (now referred to as nonexecutive chairs), who were paid like board members.

* There was a large compensation difference between the two types of chairs. Executive chairs were paid roughly 50% of the CEO's compensation, while nonexecutive chairs were paid about 20% of what CEOs were paid.

* Many of the chairs appeared to be transitional roles. Many executive chairs were retired CEOs, and many nonexecutive chairs were major investors or individuals brought in to address a crisis.

* We predicted a greater incidence of non-CEO chairs in the future and a "normalizing" of the pay levels to reflect the time required to do the job but less than the executive chairs.

Our findings this year

The Data: Equilar, an executive compensation research firm, provided us with the data for the updated review of pay. We focused on Fortune 1000 companies with $5 billion to $10 billion in revenues. We asked Equilar to provide us with 50 current examples of nonexecutive chairs and lead directors within this set of companies. Since there was a lower prevalence of executive chairs, we received a sample of 27 executive chairs.

For all of the company examples, Equilar provided the total direct compensation package for the chair or lead director, for a regular director, and for the CEO, so that we could reference the chair package to these other benchmarks. Total direct compensation includes salary, bonus, and the economic value of long-term...