Last week, MCI said it will invest 25 percent of its directors' fees in MCI common stock. Under a policy announced back in August, the rehabilitating telecom giant said it withheld 25 percent of all directors' fees earned during the previous quarter and will transfer those funds to a broker, who will purchase the shares on behalf of each director.

THE ANNOUNCEMENT

Excerpt From MCI Press Release:

Ashburn, Va., November 8, 2004 - MCI, Inc. (NASDAQ: MCIP) today announced that members of its Board of Directors will invest 25 percent of their directors' fees in MCI Common Stock. Under a process announced August 12, 2004, MCI has withheld 25 percent of all directors' fees earned during the previous quarter and will transfer those funds to a broker, who will purchase the shares on behalf of each director. Shares will be held in individual accounts in each director's name. All shares purchased will be subject to certain long-term retention requirements.

Shares will be held in individual accounts in each director's name and all of the shares that are purchased will be subject to certain long-term retention requirements.

This is in keeping with one of the many recommendations of corporate monitor Richard C. Breeden, the former SEC chairman who called for board members to be paid solely in cash. No stock options or equity grants.

According to an MCI insider, the idea is that this way the directors are not tied to the performance of the stock. However, compensation experts say they fail to see the distinction between awarding stock as part of the pay package or requiring directors to use their cash compensation to buy stock.

Koors

“Stock is stock, whether the company is giving it to them or telling the director to take cash and purchase it,” argues Jan Koors, managing director of compensation consultants Pearl Meyer & Partners, who adds that the message sent to shareholders and other outsiders is the same.

The biggest difference is that by requiring directors to buy stock in the open market with their cash, MCI’s stock is not diluted from issuing new shares from the company’s treasury. Otherwise, MCI simply becomes the latest company to provide stock as part of its compensation package to its directors. “This is a trend we have seen for a while,” confirms Koors.

In fact, according to her firm’s most recent study of director pay in 2004 at the 200 largest companies—which hasn’t been published yet—more than 25 percent of the companies require board members to own some minimum level of equity, be it outright stock, options or restricted stock, Koors points out.

In 2003, 57 percent of the total pay to board members among the 200 largest companies was in the form of equity—stock, options or restricted stock—according to Pearl Meyer. The numbers cite 2004 proxies, which are based on 2003 practices. This is consistent with the Blue Ribbon Commission, chartered by the National Association of Corporate Directors, which recommends that at least 50 percent of pay be delivered in the form of equity.

This means MCI is awarding much less stock to its directors than the average large company.

Tracking The Numbers

The 57 percent figure is actually down from 60 percent cited in 2003 proxies and a peak of 63 percent in both 2001 and 2002 proxies. Koors, however, points out that as recently as 1998, just 53 percent of compensation was in equity and just 44 percent in 1997.

So, why did equity’s share of director compensation drop for the past two years? Is this an indication that equity’s role in director compensation is starting to wane? Not necessarily. Rather, the dip is more due to the nature and mix of director compensation since the passage of Sarbanes-Oxley.

Directors at the 200 largest companies, on average, earned more than $175,000 in 2003, according to the 2004 proxies. This is up 13 percent from the prior year, according to Pearl Meyer. However, more and more of this dough is coming from compensation related to directors sitting on key committees. According to Pearl Meyer, compensation for committee service jumped, on average, by 35 percent, to more than $23,000, including a 47 percent rise in audit chair fees and retainers and a 24 percent increase for compensation committee heads.

Now, Koors stresses that companies typically pay their directors only cash for the committee participation. As a result, as more and more directors receive increasing sums for committee work, equity’s share of the total compensation pot is declining.

What’s more, Pearl Meyer found that the use of full value shares surpassed stock options for the first time since equity became a major part of director compensation programs a decade ago. The benefits consultant says that 59 percent of the companies granted stock options to directors, down from 70 percent the prior year.

The data from Pearl Meyer is somewhat consistent with the findings by the Conference Board. It reports that 41 percent of 456 companies it studied pay a portion of their compensation to directors with outright grants of stock, the same percentage as in 2003. Another 15 percent of the companies issued outright stock grants that were not part of the basic annual compensation.

However, restricted stock is actually becoming increasingly popular, with 27 percent of companies in 2004 using this form of payment, compared with just 20 percent the prior year.

Says Charles Peck, the Conference Board's compensation specialist, “The trend is toward outright grants.”

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