Trends in Director Compensation

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This week, it was reported that directors at Ford Motor Company received a pay increase of twenty-five percent. In its most profitable year since 1998, the company reported a net income of over $20 billion in 2011, and an increase in director compensation from $200,000 to $250,000. Sixty percent of the compensation package, $150,000, is awarded in the form of common stock. In 2009, the cash component of director compensation packages was entirely eliminated while the company staged a recovery from the recession.

According to results from the latest 2011-2012 NACD Director Compensation Report, Ford is an anomaly. Gleaning the public filings from 1,400 companies, the survey found that director compensation increased by six to eight percent at most companies. At the Top 200 companies, however, compensation remained fairly stagnant—increasing by just more than 1%. However, as noted in Ford’s report filed with the SEC, the company is compensating its directors for performance. In addition to a profitable 2011, company shares gained fourteen percent in the last year. Furthermore, Ford is compensating its directors comparably. Survey results found that Top 200 company directors are paid well over $200,000 per year on average. According to company spokesperson Todd Nissen, “we review all the compensation levels on a regular basis, and in the case of the board, determined this was needed to ensure we continue to attract and retain the talent we have.”

On the list of boardroom priorities, director compensation often takes a back seat to areas more directly related to corporate oversight. Year after year, respondents to our annual governance surveys consistently rank strategic planning and oversight, corporate performance and valuation, and risk and crisis oversight as their top three priorities—with director compensation at the bottom of the list. However, as companies begin to file their proxy statements with the Securities and Exchange Commission (SEC) in advance of annual shareholder meetings, director compensation often receives a spotlight in the news cycle.

This proxy season, in addition to the focus on executive compensation, boards should be aware of the discussion of “say on director pay.” Although not required, in 2011 three large companies received shareholder proposals for an advisory vote on director compensation: Chesapeake Energy, Wells Fargo, and US Bank. In 2012, a similar resolution was filed at Apple.

Boards can use the Director Compensation Report, which breaks down compensation packages by company size (based on annual revenues) to benchmark their practices against peer groups. Free to download for NACD members, it is available at our bookstore.

NACD Research Top 5

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Introducing the NACD Research Top 5: A recap of what has been on our radar this week.

  1. Just released: 2011 Nominating/Governance Committee Chair Advisory Council Summary of Proceedings
  2. On demand: Quarterly Environment Update for Q1 2012
  3. Blog post: Yahoo and the Limits of Shareholder Communication
  4. New SEC guidance on the proper wording of Say on Pay proposals on the proxy card
  5. On demand: NACD Boardroom Excellence webinar on Technology, Innovation, and Strategy

The Limits of Shareholder Communication?

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Wednesday’s NACD Directors Daily featured an article from the Wall Street Journal examining the recent moves by a large Yahoo shareholder. Daniel Loeb has indicated his intention to launch a proxy fight to “shake up the board,” and with the potential of electing four new directors to Yahoo, Mr. Loeb has certainly, at the very least, agitated the board.

Loeb’s actions come after major changes at the company. Just last month, Jerry Yang, founder of Yahoo, resigned from the board and four other members announced that they would not seek reelection at the 2012 annual shareholder meeting. Despite this extensive overhaul of the boardroom, Loeb still does not trust the board’s judgment to replace the departing members.

Instead, the Yahoo investor paints a grim picture of the board and its future. In his filing with the Securities and Exchange Commission (SEC), Loeb points out that “installing the hand-picked choices of the current Board does nothing to allay investor fears that Yahoo is poised to repeat the errors of its past.” He also contends that the current members lack the “fresh perspective and necessary experience to overhaul the Company’s challenged organizational and operating structure.” 

Yahoo’s response to the proxy challenge was one of disappointment. Their press statement indicated that the board “proactively engaged in discussions with many of [their] largest shareholders, including Third Point (Daniel Loeb).” Despite their efforts, Loeb continues on a path the Yahoo board calls “potentially disruptive.”

As stated in our Blue Ribbon Commission Report on Board-Shareholder Communications, “more communication can enhance a board’s credibility and reputation in the eyes of shareholders.” This trustworthiness is precisely what Yahoo needs right now. The board needs to engage in a second round of shareholder outreach and dialogue detailing the company’s strategy, and how the current nominees for directorship enhance their plans.   

Resolution to this challenge is still months away. Communications with shareholders will take on new importance for both Yahoo and Loeb as the annual meeting approaches. Regardless of the outcome, big changes are ahead for Yahoo.