Aon Study: Directors' Pay Up 23% In '03-'04

NU Online News Service, Jan. 11, 4:18 p.m. EST?A recent consulting firm study has found directors at U.S. public companies have seen their compensation increase 23 percent as legal changes require a higher level of performance.[@@]

Aon Consulting in Chicago said the level of cash and equity compensation grew 25 percent among small capitalized firms, 21 percent with mid-cap companies, and 23 percent among large-cap companies.

Aon said the increases were the price of increased scrutiny over corporate governance and the passage of the federal Sarbanes-Oxley law.

Peter Lupo, New York compensation leader with Aon Consulting, said, "The time commitments and responsibilities of corporate directors have increased, making the goal of attracting and retaining fully qualified board members even more difficult.

"We already know that the time commitments for many corporate directors will continue to increase. Next year, for example, it is highly likely that compensation committees will need to spend a substantial amount of time discussing, reviewing and revising long-term incentive compensation programs because of the likelihood that stock options will be expensed in 2005."

Mr. Lupo said the study did not have a breakdown by industry.

Aon said for its study, because the greatest amount of committee responsibility falls on the shoulders of the committee chair, it had reviewed the level of chair committee retainers and meeting fees.

The firm said this analysis showed chair retainers increasing at all levels. The only exception was the compensation committee chair retainer for large-cap companies that was flat from 2003 to 2004.

Audit and compensation committee chair meeting fees did not increase in any market segment, Aon found. In fact, regardless of the market segment, chair meeting fees disclosed in 2003 and 2004 remained the same at $1,000 per meeting.

Mr. Lupo said Aon Consulting believes that director pay will continue to increase, "with a greater emphasis on cash compensation than equity. We also expect companies to take a fresh look at the levels of committee pay."

He questioned that though trends show clearly that committee pay is increasing, "does this level of compensation truly reflect the time commitments and responsibilities of committee members? Are a $5,000 annual retainer and a $1,000 meeting fee for a chair of a compensation committee reasonable given the amount of time these directors will need to spend in 2005 on compensation issues? We expect many companies will decide that it is not."

Mr. Lupo said the impact of increased lawsuits against directors was not covered in the study, but he has noticed that "behaviors have changed. The compensation committee members are very careful, thorough and cautious in their review of issues."

As a consultant on a project now, "You share initial results with both the board and management. It's positive?it's a good change. We have seen some behavior changes. There is a much more thorough review of issues before board and management agree on pay increases."

Aon studied the corporate director pay practices of three market segments: small-cap companies (includes about 490 companies with revenues ranging from $100 million to $999 million); mid-cap companies (includes about 400 companies with revenues ranging from $1 billion to $4,999 billion); and large-cap companies (includes about 585 companies with revenues over $5 billion).

Discussing methodology, Aon said it assumed directors attended all regularly scheduled meetings as disclosed in the proxy statements. The consulting firm did not include pay for telephonic meetings unless these meetings were disclosed as scheduled meetings. Any disclosed special meetings were also included.

The study treated all board and committee retainers paid in equity as cash compensation, not equity compensation.

Stock and restricted stock grants were valued based on the price of the stock at fiscal year end. Options were assumed to have a value equal to one third of a share of stock. The value of one-time equity grants was annualized over five years.

Total cash compensation assumed a director sat on two committees and is the chair of one committee.

Total compensation was computed as the sum of total cash compensation plus equity.

Aon consulting provides risk management services, insurance and reinsurance brokerage, human capital and management advice, and specialty insurance underwriting. The firm had 2003 revenues of $1.185 billion.

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Aon Study: Directors' Pay Up 23% In '03-'04

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