Board directors are on the defensive. Several weeks ago, a number of former directors at Enron and WorldCom agreed to shell out some of their own money to help settle shareholder lawsuits.

Now comes an announcement that directors at Continental Airlines will be taking a pay cut. The airline said on Feb. 15 that its board agreed to reduce its directors’ base retainer fee and meeting fees by 30 percent. The directors would also forego their entire 2005 stock option grant.

Kellner

However, the board did not decrease the audit committee's retainer or meeting fees, citing “the increased oversight responsibilities caused by The Sarbanes-Oxley Act.”

"Our board took this action in recognition of the sacrifice our co-workers are being asked to make to help assure the survival of our airline," said chairman and CEO Larry Kellner in announcing the plan. "We appreciate their efforts to work together toward our goal of cutting $500 million out of our pay and benefit costs."

The directors’ announcement came the same day that Continental announced adjustments to management's annual incentive program. The number five U.S. carrier also announced that officers would forego their restricted stock units for 2005 in order to avoid the appearance that management could benefit from the $500 million reduction in pay and benefits that Continental is seeking from its employees. “The entire officer group wanted to make certain that no employee feels his or her cut was being used to fund the bonus program or the RSUs for 2005,” said Kellner.

Showing Solidarity

Gregory

According to experts, the move to seek compensation cuts from directors is very rare. “I haven’t seen a trend of cutting directors’ fees,” says Holly Gregory, partner in the corporate governance group at Weil, Gotshal & Manges.

After all, the company and the industry in general are in dire financial shape. Even so, experts assert that the move by Continental’s board is more symbolic than financial.

“The board is trying to set a tone,” Gregory notes. Essentially, they are saying: “we’re asking employees to take cuts, so we as directors are taking cuts to show solidarity,” she explains.

Ross

“Clearly in Continental’s case it a message from the top that ‘we’re in this thing together,” adds Andrew Ross, partner in the corporate and securities group of Loeb & Loeb. However, Ross doesn’t think that the move exemplifies the kinds of “tone at the top” actions governance leaders have been calling for. “I relate that issue more to the executive team,” insists Ross.

The Opposite Direction

In any case, in the large scheme of things, the bottom line benefit to Continental is not exactly huge. “We’re not talking about a whole lot of money,” Ross asserts.

According to Continental’s 2004 proxy—this year’s has not been filed yet—outside directors received $35,000 per year, plus an additional $25,000 for members of the audit committee or $40,000 for the chairperson of the audit committee.

The directors also received $2,000 for each board and committee meeting physically attended ($3,000 for the committee chair); $1,000 for each board meeting attended by telephone; and $500 for each committee meeting attended by telephone. The directors also received stock options to purchase 5,000 shares of common stock, and are entitled to a number of lifetime flight benefits.

In fact, the trend in director pay is actually in the opposite direction—toward higher compensation. According to the most recent survey published by compensation consultants Pearl Meyer & Partners, board compensation grew 13 percent to nearly $176,000 in 2003. The increases followed two straight years in which board pay at the top 200 U.S. industrial and service companies was nearly flat, according to the study. Compensation for committee service jumped about 35 percent to over $23,000, including a 47 percent rise in audit chair fees and retainers and a 24 percent pay increase for compensation committee heads.

Archer

Edward Archer, managing director in the New York Office of Pearl Meyer, doesn’t expect pay to fall any time soon. After all, the number of hours spent per board member per year has recently risen from 150 hours to 250 hours. “And recent settlements with Enron and WorldCom show there is a lot more risk,” he adds.

This said, experts insist compensation is not the number one motivating factor for individuals to sit on boards anyway. Indeed, in a separate Pearl Meyer study last year, interest in the company is the most often mentioned motivation for board service, named by three-quarters of respondents. It is followed by prestige, cited by nearly half the directors. The reasons cited least are compensation, ownership, or camaraderie, each named by fewer than one-quarter of the respondents. “[Former Toys R Us chairman] Charles Lazarus once said to me that [sitting on a board] is the ultimate adult game,” says Archer. “I agree.”

He stresses, though, that once an individual makes the decision to sit on a board in general, then compensation could play a role in deciding which board to sit on. He adds, “It’s not the determining factor whether to go on a board or not.”

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