The flap over pensions misses the real issue: A new model is needed to more appropriately reward the time, productivity, and accountability of directors.
The 1995 proxy season has witnessed over 30 challenges to outside director pension plans. These initiatives will not get far this year, but will help to sharpen the debate on the role of directors and how compensation plans might affect their behavior. The most direct outcome of these challenges may likely be to further accelerate the movement to stock compensation schemes that might ultimately replace director pensions based on the value of cash-based retainers. However, it also provides an excellent opportunity to reevaluate how directors are compensated and to bring pay-for-performance and market pricing principles into the corporate boardroom.
The issue of director retirement plans is a relatively new one. According to our Spencer Stuart Board Index (SSBI), which is an annual survey of board trends and issues at America's 100 leading corporations, less than 20% of the largest U.S. corporations provided outside director retirement plans in 1980. This figure rose to 64% in 1990 and 79% in 1994. Among the Standard & Poor's 500, such retirement plans were virtually non-existent 10 years ago, but had risen to almost 50% by 1994, according to the Investor Responsibility Research Center.
The rise of such plans coincides with relatively modest increases in retainers over the same period, and as such were justified as "necessary" for maintaining director compensation competitiveness. In addition, it was "fashionable" during the 1980s to establish deferred income vehicles for all employees, and retirement plans for directors fit this approach. The tide of acceptance for director pensions rose rapidly as a few of America's leading corporations adopted them in the late 1970s and the rest simply followed their lead.
The issue of pensions has fueled discussion among shareholders in ways not dissimilar to the debate on whether to pay directors in stock in lieu of cash. From opposite ends of the spectrum, both find root in the belief that director compensation should be tied directly to the fortunes of the company. Over the past several years, there has been considerable debate, yet no consensus or proof, that such compensation schemes change the behavior of directors or produce better company stock performance. Nevertheless, the growth of stock compensation programs are proliferating. By last year, 22% of companies in the SSBI paid part of their annual retainer in stock or provided that option. This was up from 10% in 1990. Three boards introduced this option in 1994, and several more have programs in development for implementation this year.
Mix of Approaches
Stock plans range from Amoco's program to pay one-fourth of its $50,000 retainer in shares of common stock, to United Technologies, where 60% of the retainer will be paid, at election, either in shares of common stock or in deferred stock, converted to shares of common stock upon termination of service. Several companies, including Hewlett-Packard, Unocal, and Wells Fargo, have provided options to directors to receive all their retainers in the form of common stock or restricted stock. Also, over 50% of SSBI companies are now providing stock grants and/or options for outside directors in addition to their annual retainers.
The number of companies providing such plans has doubled over the last three years. Six companies now provide for both retainer payments in stock and additional stock grants/options. Companies ranging from Allied Signal (one time grant of 1,500 shares of restricted common stock), to Colgate-Palmolive (stock grant of 275 shares per year), to Compaq (newly elected directors granted...