An update on director fees and executive compensation.

• Author: Slater, Joe
• Position: Statistical Data Included

All electric co-ops provide compensation for the chief executive, and most (but not all) pay a fee to directors for attending board meetings and performing other official duties. These forms of compensation enable co-ops to attract and retain qualified managers and directors. They are significant from a policy perspective because the sum that is provided to the manager or director is typically the result of a board decision. Determining the CEO's salary, or choosing the fee to be paid to directors, is usually determined by the board alone, based on whatever information it has, and based on its philosophy of compensation.

The purpose of this article is to provide objective information that boards can use when making these decisions. We will begin with director fees. We will review the legal background, and then present results from an NRECA survey that identifies the fees paid by co-ops on a national basis. We will also present figures regarding director benefits like health insurance, and summarize data showing the average amount that systems budget for director education. We'll conclude this section with a discussion of policy issues that boards should keep in mind when determining director fees, and how director expenses should be handled.

The second part of the article will review manager compensation. We will emphasize that the board should follow a standardized process when determining the CEO's salary, and outline one such process that boards could use.

1. DIRECTOR FEES AND EXPENSES

   We begin with a distinction between director fees and director salaries. Co-op directors are not considered to be employees of the organization, and therefore do not receive a salary. Instead, they receive a fee, a fixed daily amount for performing professional services for the organization, such as attending meetings of the board. Directors typically do not receive this fee if they are unable to perform their official duties, and they do not "earn" sick days or holidays.

   Another phrase that many boards use in describing the director fee is per diem. This means "by the day," and conveys the idea that the director receives the fee for providing professional services each day (but only each day) when performing official duties. But the phrase is ambiguous.

   In addition to meaning "by the day" it can also be used to refer to a daily allowance to cover expenses while the person is on business travel. In this sense, a per diem is a predetermined fixed sum and is provided instead of a reimbursement for actual travel expenses. To avoid confusion, we will use the phrase "director fee" rather than "per diem."

   A key issue is for the board to determine the source of its authority to set director fees (1). According to the NRECA survey, 87% of system bylaws address director fees in some way, while 71% of bylaws grant authority to the board. Although different wording may be used, a bylaw might say something like the following:

   "As allowed by Law and the Articles of Incorporation, and as approved by the board, the cooperative may pay directors a fixed fee and expenses for attending board meetings; functions, meetings or events involving the cooperative; and functions, meetings or events that enhance the director's ability to serve in the role of director. The board shall determine the manner, method and amount of any director fee or expense."

   What are the actual director fees paid by co-ops? As mentioned above, our information comes from a survey distributed by NRECA to all member systems each year. Some surveys are completed by G&Ts and statewide organizations, but we'll provide data only on distribution systems. Over 800 distribution systems were sent surveys in 2000, and 324, or 37%, returned them. A key result from the survey is presented in Exhibit 1. It identifies the minimum, maximum, and mean fees paid to directors for attending regular board meetings. The data is presented on both a regional and national basis (2).

   We can also look at fees in relation to system size as measured by the number of consumers. As shown in Exhibit 2, there is a correlation between system size and the amount of fee.

   The survey also reveals that 54% of systems provide...