Outsider Board of Director Compensation

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William M. Mercer, Inc. is an international compensation consulting firm. Enclosed is their analysis of the proxy statements of 350 major industrial and service companies in the United States.

Outsider Board of Director Compensation
Performance and Rewards
Practice Group
Communique
May 29, 1997
P&R #23

Research Communique: Outside Directors' Compensation And Benefits Among 350 Major Industrial And Service Companies (As Disclosed in 1997 Proxy Statements)

Prepared by: Steve Sabow (CRGNY)

Colin Hinkson (CRGNY)

Lori Marino (CRGNY)

Todd Denmark (CRGNY)

Reviewed by: Susan Eichen (New York)

Summary: The Compensation Research Group has analyzed outside directors' compensation and benefits from 1997 proxy statements for 350 major industrial and service companies. This group is comprised of the same 350 companies as this year's Wall Street Journal/William M. Mercer CEO Compensation Study sample.

Major findings of the 1997 proxy analysis include:

Median annual retainer increases from $30,000 to $31,531.

More directors' are receiving 100% of their annual retainer in stock: 3.1 % of the sample in 1996 versus 1.7% in 1995.

Directors' stock grants increased from 86% of the sample to 89%.

Companies granting multiple stock award types (e.g., restricted stock and stock options, restricted stock and unrestricted stock, or stock options and unrestricted stock) have jumped to 40% of the sample from 32% last year and 18% in the prior year.

Benefits for directors, now primarily deferred compensation, have leveled off at 84% of the sample, same as in 1995 but compared to 88% in 1994.

Pensions for directors have dropped to 28% of the sample from 48% in 1995 and 64% in 1994. The majority of the companies that eliminated director pensions either adopted a new director stock compensation plan or increased grants under an existing plan.

Stock ownership guidelines for directors are now being disclosed by 11.4% of the sample versus 8.9% last year and only 3.4% in 1994.

A small but growing number of companies are quietly experimenting with performance-based incentives for directors; 3.1% of the sample disclosed such awards.

While this communique is intended for internal distribution, you may also share this information with clients, prospects and the press.

Highlights Of The Outside Directors' Compensation And Benefits Analysis

1. Financials
Median
Median %

Change From 1995

Revenue (000)
$5,493,722
6.6%

Net Income (000)
304,500
10.6

Assets (000)
6,531,750
5.2

Equity (000)
2,105,554
7.9

2. Compensation Elements
Annual Retainer
Meeting Fees

Casha
Sharesb
Totala,b
Board
Committee

75th Percentile
$30,250
$26,400
$47,457
$1,500
$1,200

Median
25,000
17,000
31,531
1,200
1,000

25th Percentile
20,000
10,000
25,000
1,000
1,000

Compensation For Board Service
338 companies (96.6% of the sample) paid directors an annual cash retainer, with a median of $25,000 per annum (same as last year).

193 companies (55.1%) paid directors an annual stock retainer (in the form of restricted stock, unrestricted stock or deferred stock), with a median of $17,000 per annum (versus $13,850 last year).

11 companies (3.1%) paid the directors' annual retainer 100% in the form of shares, almost double the number of companies, 6 companies, doing so in 1995.

349 companies (99.7%) paid directors a total annual retainer, with a median of $31,531 per annum (versus $30,000 last year).

296 companies (84.6%) paid directors a board meeting fee, with a median of $1,200 per annum versus $1,000 last year.

a Consists of annual retainer paid in the form of cash. Grants that are not made on an annual basis are excluded.

b Consists of annual retainer paid in the form of shares, including the value of annual grants in the form of restricted stock, unrestricted stock and/or deferred stock. Grants that are not made on an annual basis are excluded.

Compensation For Committee Service
287 companies (82.0%) paid directors a committeec meeting fee, with a median of $1,000 per annum (same as last year).

41 companies (11.7%) paid the Chairman of a committeec a committee meeting fee, with a median of $1,500 per annum (same as last year).

61 companies (17.4%) paid directors a retainer for service on a committeec, with a median of $3,275 per annum (versus $3,000 last year).

202 companies (57.7%) paid the Chairman of a committeec a retainer for service, with a median of $4,000 per annum (same as last year).

Total Annual Compensationd (TAC)
1992
1993
1994
1995
1996

75th Percentile
$52,363
$56,275
$59,163
$61,700
$67,850

Median
43,200
45,000
48,250
51,000
54,000

25th Percentile
35,500
38,375
41,150
42,000
44,000

Total Direct Compensation (TDC)
1995
1996

75th Percentile
$73,747
$85,143

Median
59,150
65,689

25th Percentile
46,000
50,728

c Excludes individual committee meeting fees (e.g., $1,300 for audit committee meetings) and service retainers. For example, if directors receive $1,000 per meeting for each committee meeting but members of the Executive Committee receive $1,300 for attending each of their meetings, summary statistics would include the normal committee meeting fee but not the individual committee meeting fee for the Executive Committee.

d To facilitate meaningful comparison across companies, the following TAC assumptions were employed: each director attends 8 board meetings; is a member of 2 committees; attends 8 committee meetings (4 of each committee); and is a Chairman of 1 of these committees.

e TDC is defined as the sum of TAC (using the assumptions employed in footnote C) plus the value of any annual stock option grants (using a binomial option-pricing model).

3. % Change in Compensation Elements
The following statistics were calculated based solely on those companies that changed a reported compensation element during the most recent fiscal year:

% Change In

Annual Retainer
Meeting Fees

Cash
Stock
Total
Board
Committee
TAC

75th Percentile
25.0%
100.0%
33.3%
47.5%
50.0%
22.5%

Median
7.1
46.7
16.7
20.0
16.7
10.2

25th Percentile
-2.0
13.4
4.6
10.0
5.2
3.0

Valid Cases
75
144
171
32
35
187

% of Sample
21.4%
41.1%
48.9%
9.1%
10.0%
53.4%

4. Stock Arrangements
1992
1993
1994
1995
1996

Stock for Directors
63%
73%
78%
86%
89%

Stock Options
28
37
40
46
52

Unrestricted Stock
22
22
26
29
30

Restricted Stock
16
19
20
24
27

Deferred Stock
7
9
11
24
26

Otherf
1
1
1
1
1

Among the 133 companies that disclosed annual stock option grant amounts, the typical number of shares granted for annual purchase is 2,000 shares. Last year, 135 companies made a median annual grant of 1,666 shares.

While the above figure includes grant amounts to be made during the 1997 fiscal year, the following summary of binomial option grant values only includes those annual grants that were actually made during the preceding fiscal years (as are all the other dollar amounts disclosed in this communique).

Option Grant Value

1995
1996

75th Percentile
$36,967
$46,513

Median
20,481
26,748

25th Percentile
12,303
16,766

Valid Cases
121
133

f Includes stock purchase, warrants and performance shares.

Among the 48 companies that disclosed annual unrestricted stock grantg amounts, the typical number of shares granted annually is 475 shares. Last year, 51 companies made a median annual grant of 400 shares.

Among the 38 companies that disclosed annual restricted stock grantg amounts, the typical number of shares granted annually is 343 shares. Last year, 37 companies made a median annual grant of 300 shares.

Among the 31 companies that disclosed annual deferred stock grantg amounts, the typical number of shares granted annually is 400 shares. Last year, 18 companies made a median annual grant of 325 shares.

5. Stock Ownership Guidelines For Directors

While no SEC requirement exists for disclosure of ownership guidelines in the annual proxy statement, 40 companies (11.4% of sample) disclosed such guidelines versus 9.1% last year. A future Research Communique will report on the individual guidelines by company which require directors to own at the median at least 2,000 shares, or shares equivalent to three times annual retainer within five years.

6. Performance-Based Incentives
3.1% of this year's companies have made performance-based grants. Compensation Research Topics RT #2 (5/5/97) was distributed via e-mail to all Performance & Rewards practitioners and provides information on the following types of grants made at 11 companies:

Stock options granted only if company meets performance goals

Performance-contingent stock options

Performance-accelerated stock options

Performance-contingent restricted stock

Other long-term performance awards

Annual performance awards

g Annual grants of restricted stock, unrestricted stock and deferred stock are valued at closing stock price on grant date and the resulting amounts are included in the annual stock retainer reported on page two of this communique.

7. Benefits Disclosed
1992
1993
1994
1995
1996

Benefits For Directors
83%
86%
88%
84%
84%

Deferred Compensation
63
68
70
69
74

Retirement Arrangement
64
64
64
48
28

Change in Control Protection
17
21
25
26
22

Charitable Award Plan
9
11
14
14
14

Accident Insurance
13
13
12
15
14

Life Insurance
13
11
11
13
11

Medical Coverage
5
5
6
5
6

Additional Highlights
. General Directors' Data (all figures are typical counts)
Board Size - 12 Directors
Number of Inside (Employee) Directors - 2 Insiders
Number of Outside (Non-employee) Directors - 10 Outsiders
Number of Board Meetings - 8 Board Meetings
Number of Committees - 4 Committees
Number of Committee Meetings Per Committee - 4 Committee Meetings
Percent of Companies disclosing the following Committees in the proxy:
Audit Committee - 98.6%
mpensation Committee - 97.7%
.Executive Committee - 55.7%
.Finance Committee - 35.7%
.Nominating Committee - 76.3%
2. Mandatory Retirement Age for Directors

103 companies (29.4% of sample) disclosed the mandatory retirement age for directors. The most common mandatory retirement age remains age 70 (66 companies disclosed age 70), with a range of age 67 to age 75.

* * * * * * * * * *
Attached are charts that present selected survey highlights. They may be incorporated into client reports or utilized as slides in overhead presentations. Questions and other comments about this communique should be directed to Malcom Hirsh, Jr. at 617/450-6374.

Outside Directors' Compensation and Benefits

Among 350 Major Industrial and Service Companies

May 1997
Outside Directors' Compensation and Benefits

Among 350 Major Industrial and Service Companies

May 1997
TABLE OF CONTENTS
EXHIBITS/CHARTS PAGE
Financials 2

Annual Compensation 3

Annual Retainer: 1992 - 1996 4

Percent Change in Annual Compensation 5

Prevalence of Stock Arrangements for Directors: 1992 - 1996 6

Annual Stock Grants 7

Prevalence of Benefits Disclosed for Directors: 1992 - 1996 8

Outside Directors' Compensation and Benefits

Among 350 Major Industrial and Service Companies

May 1997
FINANCIALS
Revenues
Net Income

1996
% Change
1996
% Change

(000)
From 1995
(000)
From 1995

75th Percentile
$11,039,894
12.7%
$733,908
35.8%

Median
5,493,722
6.6
304,500
10.6

25th Percentile
3,074,160
1.5
139,850
-17.1

Outside Directors' Compensation and Benefits

Among 350 Major Industrial and Service Companies

May 1997
ANNUAL COMPENSATION
Retainer*
Board

Meeting Fee
mmittee

Meeting Fee
Total Annual Compensation**

75th Percentile
$47,457
$1,500
$1,200
$67,850

Median
31,531
1,200
1,000
54,000

25th Percentile
25,000
1,000
1,000
44,000

Valid Cases
349
296
287
350

* Retainer includes the value of annual grants in the form of restricted stock, unrestricted stock and/or deferred stock. Grants that are not made on an annual basis are excluded.

** To facilitate meaningful comparison across companies, the following total annual compensation assumptions were employed: each director attends 8 board meetings; is a member of 2 committees; attends 8 committee meetings (4 of each committee); and is a chairman of 1 of these committees.

Outside Directors' Compensation and Benefits

Among 350 Major Industrial and Service Companies

May 1997
PERCENT CHANGE IN ANNUAL COMPENSATION
% Change* From 1995

Retainer
Board

Meeting Fee
mmittee

Meeting Fee
Total Annual Compensation*

75th Percentile
33.3%
47.5%
50.0%
22.5%

Median
16.7
20.0
16.7
10.2

25th Percentile
4.6
10.0
5.2
3.0

Valid Cases
171
32
35
187

* Calculated based solely on those companies that changed a reported compensation element during 1996

Outside Directors' Compensation and Benefits

Among 350 Major Industrial and Service Companies

May 1997
PREVALENCE OF STOCK ARRANGEMENTS FOR DIRECTORS: 1992 - 1996

1992
1993
1994
1995
1996

Stock for Directors
63%
73%
78%
86%
89%

Stock Options
28
37
40
46
52

Unrestricted Stock
22
22
26
29
30

Restricted Stock
16
19
20
24
27

Deferred Stock
7
9
11
24
26

Other
1
1
1
1
1

Outside Directors' Compensation and Benefits

Among 350 Major Industrial and Service Companies

May 1997
PREVALENCE OF BENEFITS DISCLOSED FOR DIRECTORS: 1992 - 1996

1992
1993
1994
1995
1996

Benefits for Directors
83%
86%
88%
84%
84%

Deferred Compensation
63 68 70 69 74
Retirement Arrangement
64 64 64 48 28

Change in Control Protection
17 21 25 26 22

Charitable Award Plan
9 11 14 14 14

Accident Insurance
13 13 12 15 14
Life Insurance
13 11 11 13 11

Medical Coverage
5 5 6 5 6