Director pay: the 'why' behind the 'what'; Establishing principles to address specific pay program amounts and components will help the board to ensure that decisions regarding director pay are made thoughtfully, holistically, and accurately.

• Author: Jones, Blair
• Position: DIRECTOR COMPENSATION

AS WE EXIT an era of shallow confidence and enter one of cautious optimism, shareholders will be looking to the stewards of America's corporations--its directors--to help guide the way. In order to bestow such a high level of expectation upon this cadre of leaders, the question first must be answered: Is there a well-defined set of rewards in place that makes it worth their while to lead the charge?

Though historically very few directors have cited pay as a key factor in their own attraction and retention, an imprudent compensation plan design may--all else equal--convince a director that his or her scarce time is better spent on a board whose pay for services more fairly reflects that director's perception of personal value. And, given the significant investor scrutiny on directors and their workloads, directors must use more discretion than ever before when considering where to focus their energies.

In much of our recent work with boards and governance committees, Sibson has found that establishing a set of coherent, well-defined guiding principles is an excellent foundation for designing and implementing director compensation programs, and for communicating the intent of these programs to external constituencies. At first blush, this should be a somewhat intuitive step in determining compensation. After all, boards and compensation committees have been establishing executive pay in the context of guiding principles for many years. However, just because directors are not paid to actively manage a company does not mean their pay should not be governed by a set of principles shared by each member of the board.

In one instance, Sibson worked with the governance committee of a Fortune 500 board, whose organization was enduring a number of strategic challenges, to revise its director pay program. Because of these strategic challenges, the focus and intensity of its directors' efforts was changing--yet in many ways, the types of duties for which they remained responsible were fairly constant. Before submitting plan design recommendations to the committee, we worked with the committee chair and board chair to create and refine the guiding principles that would become the foundation of the revised plan design.

It is important to note that, although the management of this organization was driving a number of significant changes, the rationale for developing guiding principles was based on the board's desire to create a director pay program that was aligned with the company's business needs, appropriately consistent with the...