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Whom do directors work for?
Excessive pay for directors contributes to the widening income gap in this country. That gap is raising social tensions and bolstering the support of reform candidates for president such as Democratic Sen. Barack Obama, who co-sponsored legislation that would give shareholders a nonbinding vote on executive pay, or "say on pay."Extreme director pay can hurt investors more directly. Directors are supposed to serve as a check on managers who might make decisions that line their pockets at a cost to investors. "When a directorship becomes an avenue for enrichment, it may misalign directors' interests because they essentially become insiders," Ferlauto says.
"It is like a payoff," agrees Pedrotty, of the AFL-CIO. "You aren't going to want to alienate or get aggressive with someone who is paying you a substantial amount of money for showing up for 15 meetings a year. This just underscores what we have understood all along that the gatekeepers are part of the problem."
The Securities and Exchange Commission only recently told companies to begin disclosing more about director pay, and these extraordinary pay packages went public during the 2007 proxy season, which essentially closed a few months ago.
So investors are only now getting a look at the often-astonishing pay levels for the part-time job of sitting on a company board, with the highest pay often going to former execs.
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Paul Hodgson of The Corporate Library examined the pay levels of more than 25,000 directors and presented his findings in a report. Besides the basic cash fees, companies now put numbers on rewards such as options, deferred compensation, pension plans and other kinds of perks and goodies. "Many of these amounts were merely guessed at in prior years," Hodgson says.
3 more sweet deals
The examples I offer you here come from his study. Here are three more:- Winning the Tour de France seven years in a row didn't earn Lance Armstrong extra pay as a director. Armstrong was paid $55,800 for serving on the board of upscale hotel operator Morgans Hotel Group (MHGC, news, msgs) in 2006. But Morgans paid board Chairman David Hamamoto somewhere between $2.7 million and $7.2 million for attending just nine meetings that year, based on the accounting assumptions used to determine the value of restricted stock and options it granted him in 2006.
- Peter Ueberroth apparently learned about "going for the gold" as chairman of the U.S. Olympic Committee. His pay as a director at Aircastle (AYR, news, msgs), which leases jets to commercial airliners, is of truly of Olympic-size proportions. In April 2006, Aircastle sold a Ueberroth family trust 200,000 shares of its stock at $5 per share. That works out to the equivalent of a payment of $3.8 million at the recent stock price of $24. The board met four times in 2006. Ueberroth also collects $30,000 a year, and in 2007 he got restricted stock worth more than $300,000, a grant that continues this year and next.
- Jon Huntsman, the chairman of the board for Huntsman (HUN, news, msgs), was paid $2.4 million for his role at the chemical company in 2006. The board met 11 times.
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Ueberroth responds that the discounted stock he received was a just reward for having come up with the idea for the company -- an idea which was developed with help from private-equity shop Fortress Investment Group (FIG, news, msgs). He says he also helped line up some key managers and directors, and the payment was less than consultants and executive search firms would have charged.
"It was a pretty good idea, and the company is employing a lot of people," Ueberroth says.
Similarly, Hamamoto helped found Morgans Hotel Group. The company declined to comment on his compensation.
Huntsman's company says he got $1 million of the $2.4 million in 2006 pay for consulting services and $1.1 million as a one-time bonus for his contribution to cutting costs. He was the company's chief executive at its start.
At the time of publication, Michael Brush did not own or control shares of any of the equities mentioned in this column.
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