Administration April 9, 2007

Regulations Driving Director Compensation Changes

September 28, 2005 (PLANSPONSOR.com) - A new study by Pearl Meyer & Partners (PMP) found that average director compensation is seeing double digit increases due to increased responsibilities and recruiting challenges driven by new regulations.
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According to its news release, PMP found that average compensation for directors of US companies reached over $195,000 in 2005, reflecting a second year of double digit increases.   Average total compensation grew 11%, marked by a shift in the use of equity incentives, according to the report.

However, the trend away from stock options to restricted stock grants continued.   The study showed that more Boards adopted minimum stock ownership requirements, reflecting the executive pay practice of linking compensation with long-term shareholder value, the announcement said.

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A record 86% of the Top 200 companies provided Directors with grants of full-value shares, which rose an average one-third in value to $67,801, the study found.   But, about half of Boards provided members with stock options, down from three-quarters of the Top 200 in 2002.   In addition, according to the news announcement, option values fell for a third straight year, down 13% to $43,235.

In addition, the study found an increase in retainers for Chairs of Audit and Compensation Committees, which PMP attributes to the increased scrutiny these committees are under from regulators.   Retainers rose an average 19% to $16,082 for Audit Committee Chairs and an average 14% rise to $11,312 for Compensation Chairs.

Additional findings of the study, according to the release, include:

  • Directors of Securities and Healthcare companies were pay leaders by a wide margin, posting double-digit increases that brought average Board compensation in both sectors to nearly $350,000.
  • The usually highly ranked Diversified Financial industry dropped to the eighth place in total pay at $204,098.
  • The lowest average levels of pay were reported by companies in the Wholesalers/Distributors and Energy/Utilities industries at $157,219 and $154,084, respectively.
  • The average Top 200 Board has 10 members, with most electing Directors either annually or for three-year terms.
  • Nearly half of major companies maintain a mandatory Board retirement age, most commonly 70 or 72 years.
  • A total of 48 companies have chosen to separate the positions of Chairman and CEO, while 71 Boards have selected a Lead Director.

Findings of this study mirror the findings of a recent study on executive comp pay practices conducted by Frederic W. Cook & Co. (See  Composition and Compensation of Board of Directors Changing ).

The PMP survey group is composed of the 200 largest public US industrial and service companies, excluding mutual companies and companies with dominant insider ownership.   Pearl Meyer & Partners is a practice of Clark Consulting and gives counsel to Board Compensation Committees and senior managements.

The company said the full 2005 Director Compensation Study report will be available later this fall.

Administration April 8, 2007

Execs Call for Options Expensing Rule to Be Killed

August 16, 2006 (PLANSPONSOR.com) - Thirty business executives have signed onto a business journal article that calls for federal regulators to revoke the new rule requiring the expensing of employee stock options.
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Principally written by venture capitalist Kip Hagopian, the position paper was aimed at the US Securities and Exchange Commission (SEC) with the request to revoke the Financial Accounting Standards Board’s (FASB) rule (See  FASB Hands Down Option Expensing Proposal ), according to Newswise news service. The paper appeared in the summer of 2006 edition of the California Management Review, which is published by UC Berkeley’s Haas School of Business.

According to a news report about the document, the article signatories asserted that the expensing rule hurts and not helps company financial statements. The report said the signatories included three Nobel Prize winners in economics, two former CEOs of Big Four accounting firms, two former US Treasury secretaries and prominent academics.

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“Mandating the expensing of employee stock options is one of the most radical changes in accounting rules in history, and we believe the FASB and the SEC have made a mistake,” said Hagopian, in the news report “We are concerned that the SEC did not hold its own hearings on this rule, and we are asking the commission to reopen this issue for review and debate.”

The paper’s conclusions included that:

  • an Employee Stock Option (ESO) is a “gain-sharing instrument” in which shareholders agree to share their gains (stock appreciation), if any, with employees;
  • a gain-sharing instrument, by its nature, has no accounting cost unless and until there is a gain to be shared;
  • the cost of a gain-sharing instrument must be located on the books of the party that reaps the gain;
  • in the case of an ESO, the gain is reaped by shareholders and not by the enterprise; so the cost of the ESO is borne by the shareholders. This cost to shareholders is already properly accounted for under the treasury stock method of accounting (described in FAS 128, entitled, “Earnings per Share”) as a transfer of value from shareholders to employee option holders; and
  • neither the grant nor the vesting of an ESO meets the standard accounting definition of an expense. Companies do not forgo any cash when they grant ESOs, so their issuance cannot be an opportunity cost.

To order a copy of the position paper go to  http://cmr.berkeley.edu/order.html .

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