As Board Risk and Responsibility Increase, So Does Pay, According to Hewitt Associates; Stock Option Use Declines, as Restricted Stock Gains Popularity.

LINCOLNSHIRE, Ill. -- Greater accountability and responsibility placed on board members is leading to increased compensation, according to Hewitt Associates (NYSE:HEW), a global human resources outsourcing and consulting firm.

Hewitt surveyed more than 170 major U.S. companies (median revenue of $3.7 billion) and found that the median retainer for board members grew to $40,000 in 2004 from $35,000 last year. Board member meeting fees also increased to a median of $1,500 per meeting, up from $1,250 in 2003. (These findings are consistent with Hewitt's analysis of Fortune 250 companies, which shows that total board compensation for this group increased by 17 percent in 2004.) Meanwhile, 23 percent of companies increased retainers for committee chairs, with the Audit Committee Chair receiving the highest fees of $10,000 this year, compared to $5,000 in 2003.

"Recent corporate governance issues have led to more stringent requirements for board service, along with greater responsibility and risk for board members," said Gerard Leider, senior consultant with Hewitt Associates. "Consequently, qualified board members are cutting back on the number of boards on which they serve. This increased risk, and the economics of board member 'supply and demand,' resulted in an increase in board pay. That said, as board pay evolves, companies need to evaluate these compensation packages to make sure they fit within corporate governance guidelines and are market competitive."

Equity Compensation

Hewitt's study shows that companies are also changing their approach to equity compensation. Stock options are less popular, with 59 percent of companies providing them to board members in 2004, compared to 68 percent in 2003. At the same time, companies are increasing restricted stock/unit awards (from 27 percent in 2003 to 34 percent in 2004).

"Restricted stock and stock units are becoming more prevalent, as they provide a long-term outlook and link to shareholder interest," said Leider. "In fact, this form of equity compensation is beginning to replace portions of stock options in both board and executive pay packages."

Heightened attention on stock ownership has also led some companies to institute ownership guidelines for board members. Specifically, 44 percent of companies currently have such guidelines, compared to 33 percent last year.

Benefits and Perks 

In addition to the traditional cash and equity forms of compensation, 43 percent of organizations provide benefits to the board and 58 percent offer perks. The most common benefit is travel/accident insurance (79 percent), while the most popular perk is a matching charitable gift program (65 percent).

"We do not expect the prevalence of these programs to change dramatically, as the economic values are relatively small and companies are more focused on the elements of compensation for directors that tie their interests to shareholders," said Leider.

Additional Data Highlights

Following are additional highlights from Hewitt's study:

--The average number of inside board members is two, while the average number of outside members is nine.

--Nearly two-thirds (65 percent) of companies have the current CEO serving as chairman of the board.

--On average, companies hold six board meetings per year.

--Approximately two-thirds (64 percent) of companies have a mandatory retirement age for directors, which is 70, on average.

About Hewitt

Hewitt Associates (www.hewitt.com) is a global human resources outsourcing and consulting firm. It provides services from offices in 38 countries.