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Director Pay In Flux - 2003 Proxies Reveal Restructuring of Board Pay Programs

NEW YORK, May 12, 2003 - An early proxy analysis of 50 of the largest U.S. companies shows over 70% making changes in their Board compensation programs this year - twice as many firms as normally review Directors' pay in a given year, according to executive compensation consultants Pearl Meyer & Partners.

The changes point to the start of a major shift in the level and structure of Board pay programs as a result of the Sarbanes-Oxley Act and new proposed rules and regulations aimed at improving Board oversight. Those initiatives will significantly affect the nature of service on corporate Boards, as well as the challenges of recruiting qualified new Directors.

"The intense focus on better corporate governance will result in higher levels of Board pay to recognize the increased responsibilities, the number and duration of Board and committee meetings and the new governance standards that Directors will be measured against," said Edward C. Archer, Managing Director of Pearl Meyer & Partners. For example, 28% of the companies in the proxy review increased Board retainers by an average of 49%. Mr. Archer predicted that average Board total remuneration is likely to grow upwards of 20% this year, with a potential total rise of 50% or more over the next several years.

Differentiated pay favored
In addition to higher overall pay, there is a trend toward differentiating Director pay based on an individual member's responsibilities. For instance, about one-third of the companies surveyed instituted or raised committee chair retainers, reflecting the increasingly pivotal role played by committees in the conduct of major Board business. Audit Committee Chairs were the most affected, reflecting the imposition of heightened qualifications for membership and more rigorous procedural requirements in the wake of recent accounting scandals. Additionally, 6% of companies added or increased compensation for a Lead Director or separate Chairman, positions that many corporate governance watchdogs advocate to enhance a Board's independence.

Use of stock options questioned
While Director pay programs continue to include a significant equity component, a quarter of the companies surveyed reported changes in their grant practices. Of those, twice as many shifted to more use of full value shares in Director pay programs as opposed to those that increased option grants. Mr. Archer said heavy use of stock options at some companies has been blamed for fostering an inappropriately short-term performance perspective among Board members. The prolonged market slump has provided an additional reason for companies to rethink equity use.

Mr. Archer noted that the full impact of corporate governance concerns on Board pay programs will not be evident for several years, as major companies phase in program changes. Full details on 2003 pay practices will be provided in Pearl Mayer & Partners' 2003 Director Compensation report, focusing on the Top 200 companies, as well as in the National Association of Corporate Directors' annual Director Compensation Survey, which will include more than 1,000 additional companies.

About Pearl Meyer & Partners

For over 20 years, Pearl Meyer & Partners (www.pearlmeyer.com) has served as a trusted independent advisor to Boards and their senior management in the areas of compensation governance, strategy and program design. The firm provides comprehensive solutions to complex compensation challenges for companies ranging from the Fortune 500 to not-for-profits as well as emerging high-growth companies.These organizations rely on Pearl Meyer & Partners to develop programs that align rewards with long-term business goals to create value for all stakeholders: shareholders, executives, and employees. The firm maintains offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, Los Angeles and San Jose.