Directors' pay is going up and more of the compensation is coming in the form of cash rather than stock options.

According to a comprehensive analysis of director compensation at Fortune 500 companies, conducted by Executive Compensation Resources, a newsletter published by Towers Perrin, more companies are paying a premium for audit committee service and are paying additional fees to a lead director.

In addition, a number of companies are simplifying their director pay package by eliminating meeting fees in favor of a single cash retainer.

ECR analyzed the compensation of outside directors for 469 of the Fortune 500 companies that filed their 2003 proxies by May 28, 2004. It then compared this data for the same companies the prior year.

The results:

Total remuneration jumped 19 percent to a median $140,350.

Total cash increased 14 percent at the median.

Total annual/recurring stock compensation increased 17 percent at the median.

About 40 percent of the pay was in cash, 60 percent in stock for both years.

In the study, total cash compensation is based on the following assumptions regarding board and committee cash fees: eight board meetings for all companies; four committee meetings per committee, the director sits on two "typical" committees and chairs one and the committee and board meetings occur on different days.

Towers Perrin also found that companies are changing the way they are compensating directors with equity, even though the overall use of stock remained the same over the past two years.

For example, 54 percent of companies used stock options in 2003, down from 63 percent the prior year.

On the other hand, the use of full-value shares increased, as 68 percent of companies awarded at least one type of full-value shares to their directors in 2003, up from 63 percent the prior year.

Companies are also recognizing the critical importance of the audit committee in the age of Sarbanes-Oxley, acknowledging these roles come with more responsibility and accountability.

For example, 23 percent of companies are paying retainers for serving on the audit committee, compared to 14 percent who pay retainers for service on other committees. In addition, 62 percent of those companies that pay retainers are paying directors more to serve on the audit committee than other committees.

The average retainer paid for audit committee service was $11,783, versus an average fee of $6,405 paid for service to other committees.

80 percent of the companies pay an additional retainer to the audit committee chair—a median of $10,000 compared to a median of $5,000 retainer paid to other committee chairs. The audit committee chair is expected to be a financial expert, and the position carries additional legal liability concerns.

The study also indicated that companies are slowly moving toward simplifying their fee structure for directors, moving to a flat fee and eliminating meeting fees. Altogether, 28 percent of companies pay a cash retainer and no meeting fees of any kind, according to Towers Perrin.

Another governance trend is the creation of a lead director. In the study, 11 percent of the companies paid additional fees to the lead director last year. And 90 percent of those companies paid a cash retainer that averaged an additional $27,160.

The study also showed that a growing number of directors own stock in the companies whose boards they serve. In fact, 35 percent of the companies said they have some sort of stock ownership guidelines, compared with 19 percent the prior year.

Judith Fischer, director of research for Towers Perrin, says the study "reflects new expectations [of directors]. Before, they were based on moral grounds, now they are based on fiduciary grounds."

She adds that the changes indicated in this year's study will not slow down any time soon. "The make-up of boards will change dramatically over the next two years," she says.

 

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