In the good old days, when shareholders rarely raised their voices, company directors would often find a crisp $100 bill tucked beneath the dinner plates in the corporate dining room. That's when the honoraria for serving on corporate boards were sparse and the perks few.
Now, as more companies heap stock- option packages onto directors, director pay is soaring to record levels. And a new analysis of pay to outside directors by executive-compensation critic Graef S. Crystal finds many companies are grossly overpaying their overseers.
Which has the dubious distinction of having the most overpaid directors in the U.S.? Dallas Semiconductor Corp. wins hands down. Thanks mainly to stock-option grants, the custom chipmaker's outside directors averaged annual pay of $195,200 from 1993 to 1995. Such compensation for a boardroom job, says Crystal, is 559% higher than it should be when taking into account Dallas's size and stock-market performance.
"INCESTUOUS." Not surprisingly, perhaps, if the CEO is deemed to be overpaid, the directors who decide what the boss gets are often mightily compensated to sit in the boardroom. "There is something incestuous going on here," says Crystal. "Is it any wonder that when a CEO is paid above competitive levels, he tends to return the favor to the people who helped him out?"
Dallas Semiconductor is a case in point, according to Crystal. Besides the overpayment to the board, CEO C. Vin Prothro, who earned an average $3.3 million in each of the past three years, or over $9.8 million total, was overpaid by 224%, according to Crystal. Prothro says it is unfair to place a value on his or the board's option grants before they are exercised. "Valuing options like that would be like going to a fortune teller to fill out your tax return," he retorts. "If I really believed what he says, I would have to call the FBI and report a theft, because I certainly don't see $9 million in my bank account."
The study examined director pay at 963 of the nation's largest public corporations. Pay includes annual retainer, meeting fees, stock-option value at the date of grant, and pensions for outside directors. Crystal looked at pay from 1993 to 1995 to smooth out the impact of a large option grant awarded in one year. The study didn't, however, tally the benefits of such perks as insurance, one-time grants of stock options for new board members, free cars, or travel. Crystal then compared the average pay of each director to the company's average performance, measured by stock appreciation and reinvested dividends over three years.
The average annual pay for an outside director was $44,000, ranging from a high of $368,000 at Minnesota-based HMO concern United Healthcare Corp. to a low of just $550 a year for the outside directors of National Presto Industries Inc., an appliance maker in Wisconsin. The overall averages lead some boardroom observers to argue that many directors are underpaid. "A good number of companies are underpaying for the time and effort directors now have to spend on the complex issues they deal with today," says John M. Nash, president of the National Association of Corporate Directors (NACD).
That's less true, however, when companies shift more pay to stock-option grants. And almost all of the largest pay packages include hefty grants urged on companies by corporate-governance activists who say options align the interests of directors and shareholders. Indeed, a 1995 NACD task force recommended that companies pay at least 50% of director fees in equity, with an eventual goal of paying 100% in stock. Crystal found that 39% of companies now grant stock options to outside directors, up from 29% a year ago.
STINGY? Today, most companies still provide rather small option packages to directors. Bell Atlantic Corp. and Federal Express Corp. award options for just 1,000 shares annually to their directors. But some companies--especially many of those that landed on Crystal's overpaid list--are giving out much larger options.
Consider United Healthcare's outside directors. While board members there now receive an annual retainer of just $20,000 and $1,500 extra for every board meeting they attend, stock-option grants have made a huge difference. In 1993 and 1994, directors got option grants on as many as 64,000 shares, worth nearly $750,000 in total. Last year, the company became a bit stingy, handing out options on 16,000 shares worth $274,900.
That's a bit of a cutback. But it's still better than a crisp C-note under a plate.