The Implications of Say on Director Pay (Part 6)

We annually examine director compensation on this Blog.  The amendments to compensation disclosure adopted by the Commission in 2006 required companies to include in their proxy statement a table showing the amounts paid to directors.  Moreover, as with the CEO, CFO and three highest paid executive officers, the table must show the total compensation for directors. 

There is considerable speculation that transparent disclosure of CEO compensation caused compensation to increase.  CEOs and boards could see more clearly what benefits other top executives received in comparable companies.  The Lake Wobegon effect resulted in the general impression that all CEOs were at least above average, causing CEOs to seek and boards to approve packages that were invariably above average.  The result was a constant increase in averager.

In 2011, there were at least three proposals calling for an advisory vote on director compensation.  They included Chesapeake Energy, Wells Fargo, and US Bank.  Two of the proposals (Wells Fargo and US Bank) were submitted by the same individual:  Gerald R. Armstrong.  With respect to Wells Fargo, Armstrong appeared concerned with the excessive amounts paid to directors.  In the resolution submitted at US Bank, he expressed this concern: 

• the levels of compensation afforded our top management and members of the Board of Directors, who are to be independent, when U.S. BANCORP had to reduce its dividend payments in the absence of sufficient profits.

The three proposals were defeated, although the vote at Chesapeake Energy was close (receiving 46.3% of the votes cast). 

At US Bank, the current report provided the following tally:  99,613,303 voted for, 1,194,088,441 were voted against (abstentions were 50,820,827, broker non-votes were 262,262,118). 

At Wells Fargo, the current report provided the following tally: 195,690,433 voted for, 3,629,404,269 were voted against (abstentions 217,613,344; broker non-votes, 487,392,539).

At Chespeake Energy, the current report provided the following tally:  192,498,769 voted for, 222,421,855 voted against (abstentions were 31,292,879 and broker non-votes were 110,296,773).

The outcome is likely related to the amount paid.  The director fees at Chesapeake were the highest of the three companies, with most directors receiving total compensation of around $600,000.   In addition, the directors held four meetings in person and nine meetings by telephone conference.  At Wells Fargo, most of the directors received total compensation of about $300,000 and met eight times in 2010.   At US Bank, directors received total compensation of about $230,000 and met six times. 

This season, at least one proposal has been submitted to Apple by James McRitchie at Corporate Governance.  In 2010, two directors at the company received total compensation of over $1 million, while three others had total compensation of over $800,000.  As the proxy statement disclosed:  "The Board met a total of four times during 2010."  A post on director compensation for Apple is here.  There are likely to be others.

This is an area that will probably see increased activity as time progresses.  For one thing, the SEC only required the disclosure of "total compensation" paid to directors in 2006.  As a result, this type of information is relatively new.  As was the case with CEO compensation, the disclosure may put upward pressure on director compensation as the Lake Wobegon effect takes over.   To the extent the amounts climb, criticism and the number of proposals will grow.

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The Implications of Say on Pay: Fiduciary Obligations (Part 3)

Congress and Rule 14a-21 provided that say on pay was an advisory vote.  Section 14A specifically provides that the advisory vote does not overrule a decision of the board of directors.  It also provides that the Section does not change fiduciary duties or create an additional fiduciary duty.  Section 14A(c), 15 USC 78n-1(c). 

The provision was always an odd one.  Fiduciary duties are matters of state law.  Whatever limits Congress intended to impose on federal regulators, the provision was not designed to limit states and their right to develop fiduciary obligations.  Nor did the provision prohibit courts from taking notice of the results of an advisory vote when considering alleged fiduciary violations.  

And, indeed, in the aftermath of say on pay votes, shareholders have sued boards of at least ten companies for breach of their fiduciary obligations.  In one case (Johnson and Johnson), the law suit was filed even though the pay package received majority support.  The companies subjected to lawsuits include:

1. Cincinnati Bell, the complaint was filed in federal court in Ohio (NECA-IBEW Pension Fund v. Cox, 1:11-cv-451 (S.D. Ohio, filed July 5, 2011))
2. Dex One (Del; the voting results on the advisory vote are here), the complaint was filed in federal court in North Carolina (Haberland v. Bulkeley, 5:11cv-00463-D (E.D.N.C., filed September 1, 2011)).
3. Jacobs Engineering Group Inc. (Del; the voting results on the advisory vote are here); the complaint was filed in California state court (Witmer v. Martin, BC454543 (Feb. 4, 2011 Ca. Super. Ct.))
4. Hercules Offshore (Del; the voting results on the advisory vote are here); the complaint was filed in state court in Texas (Matthews v. Rynd, 2011 34508 (Tex. Dist., filed June 8, 2011)).
5. Janus Capital (Del; the voting results on the advisory vote are here), the complaint was filed in the federal district court of Colorado (Pinsly v Scheid, 1:2011cv01732 (D. Colo. July 1, 2011)
6. Johnson & Johnson (Del; the voting results on the advisory vote are here), the complaint was filed in federal court in the district of New Jersey (THE GEORGE LEON FAMILY TRUST v. Coleman, 3:2011 cv 05084 (D. NJ Sept. 1, 2011).
7. Beazer Homes (Del; the voting results on the advisory vote are here), the complaint was filed in Georgia state court  (Teamsters Local 237 v. McCarthy, 2011CV 197841 (Ga. Super., filed March 15, 2011))
8. Umpqua Holdings (Ore; the voting results on the advisory vote are here); the complaint was filed in federal court in Oregon ((Plumbers Local No. 137 Pension Fund v. Davis, CV 11 633 AC (D. Or., filed May 25, 2011)). For a description of the case in the Company's quarterly report, go here.

In 2010, two other companies were subjected to actions following votes on say on pay, Occidental Petroleum, see Gusinsky v. Irani, BC442658 (Cal. Super., filed July 29, 2010), and KeyCorp, see King v. Meyer, CV 10 730994 (Ohio Com. Pleas, filed July 6, 2010). 

So what has happened in these cases?  Suits filed in 2010 have settled.  As Davis Polk described: 

• Last year, we saw shareholder derivative suits filed on behalf of KeyCorp (in Ohio state court) and Occidental Petroleum (in California state court) in connection with failed say-on-pay votes during the 2010 proxy season.  KeyCorp agreed, according to Reuters, to pay $1.75 million in attorneys’ fees and expenses to settle related suits and Occidental Petroleum, faced with three suits, settled one for an undisclosed amount and had two dismissed.  Both KeyCorp and Occidental announced significant changes to their executive compensation practices following the shareholder suits.

The KeyCorp settlement agreement is here. With respect to the lawsuits filed in 2011, the case against Beazer was dismissed.  There is no written opinion.  According to a description by Drinker Biddle:

• In an order issued on Sept. 16, 2011, the Georgia state trial court granted the defendants' motion to dismiss the lawsuit on all counts. The court held, among other things, that the adverse shareholder say on pay vote failed to rebut the presumption under the business judgment rule that the directors acted in good faith when the board approved the executive officers' compensation. The court stated that the plaintiffs' complaint failed to allege particular facts that raised a reasonable doubt that the directors failed to exercise valid business judgment, and that the plaintiffs' "[h]indsight second guessing [was] fundamentally inconsistent with the business judgment analysis." The court also stated that the plaintiffs' contention that the Beazer's shareholders' "independent business judgment" rebuts (or indeed even serves as evidence to rebut) the presumption that the directors were entitled to business judgment protection had no support under Delaware law or the Dodd Frank Act, noting that the Dodd-Frank Act specifically provides that the shareholder vote is advisory only (i.e., nonbinding) and in no way alters a director's fiduciary duties.

In the case involving Cincinnati Bell, the trial court issued an order declining to dismiss the case.  The court agreed that the allegations stated a claim for abuse of discretion or bad faith.  The court also excused demand.  With the shareholders alleging that the directors had "devised the challenged compensation, approved the compensation, recommended shareholder approval of the compensation, and suffered a negative vote on the compensation," the court found that they had alleged sufficient facts "to show there is reason to doubt these same directors could exercise their independent business judgment over whether to bring suit against themselves for breach of fiduciary duty in awarding the challenged compensation."

The decision in Cincinnati Bell has been criticized while the decision in Beazer has been viewed by some commentators as correct.  The risk that compensation cases may, however, do better in jurisdictions outside of Delaware is nothing new.  The case against compensation paid by Viacom is a case in point.

There are a number of observations that can be offered at this stage.  First, there were seven lawsuits filed against companies where shareholders failed to approve the compensation package (shareholders approved the package submitted by Johnson & Johnson).  This suggests that companies incurring an adverse vote will not always be sued (there were 38 instances where this occurred) but the risk is high.  This provides directors with an additional incentive to structure pay packages in a manner that will garner shareholder approval.

Second, most of the companies subject to these suits were incorporated in Delaware.  This is no surprise since 60% of the largest public companies are incorporated in the state (see Opting Only In:  Contractarians, Waiver of Liability Provisions, and the Race to the Bottom).  The standards for derivative suits are determined by the state of incorporation.  Delaware has particularly favorable law for management in this area (see the discussion of In re Goldman).  Perhaps as a result, all of the cases have been filed outside of Delaware where plaintiffs presumably hope for a more favorable judicial reception.

Third, the dynamics will likely change in the next proxy season.  For the first time, companies will have to disclose their response to the advisory vote.  To the extent that companies effectively "ignore" the advice, the risk of a derivative suit likely increases.  A negative vote is arguably a red flag that triggers a duty of good faith (part of the duty of loyalty).  Directors who do not respond to a negative advisory vote or who respond, in the eyes of shareholders, in an inadequate fashion, may see themselves subject to a claim of breach for fiduciary duties. 

We have posted pleadings and other primary documents on the Say on Pay cases filed in federal court (Cincinnati Bell; Johnson & Johnson; Umpqua Holdings; Dex One; and Janus Capital) on the DU Corporate Governance web site.

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Dodd Frank, Compensation Ratios, and Agency Discretion (Part 5)

So where does this leave the implementation of Section 953(b)?  Most of the concerns expressed by issuers (the frequency of disclosure, the complexity of the formula) can be addressed in the rulemaking process.  The Commission has considerable discretion in fashioning a provision that provides the information required by Congress without imposing unnecessary costs or complexities on public companies.

The remaining issue concerns the definition of employee.  Some prefer that the ratio be calculated without including part time and overseas employees.  Resolution has significant consequences.  The inclusion of part time and foreign workers (particularly those in low wage countries) will likely lower the median compensation paid to employees and increase the ratio. 

The plain meaning of "employee" would seem to encompass all categories, including part time and foreign.  Moreover, the failure to include them would allow companies to more easily manipulate the ratio by moving low paid employees into these categories, something arguably inconsistent with congressional intent. 

In resolving this issue, the burden would seem to be on those supporting exclusion of these categories to show that this was a result that Congress intended.  The statute does not directly speak to the issue, nor does contemporaneous legislative history. 

The sponsor of the legislation has indicated that these categories of employees are to be included.  See Letter from Senator Menendez (Jan. 19, 2011) (“Specifically, I want to clarify that when I wrote "all‟ employees of the issuer, I really did mean all employees of the issuer. I intended that to mean both full-time and part-time employees, not just full-time employees. I also intended that to mean all foreign employees of the company, not just U.S. employees.”).

This issue will likely attract considerable commentary in the rulemaking process and, at least in the first instance, seems to be a matter where the SEC has the least amount of regulatory discretion.

For a more detailed discussion on this issue and Section 953(b), see Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process.

Dodd Frank, Compensation Ratios, and Agency Discretion (Part 4)

We are discussing the rulemaking authority of the Commission with respect to the implementation of Section 953(b), the provision that provides for mandatory disclosure of compensation ratios.

The Section provides that employee compensation is to be determined in accordance with Item 402.  Specifically, the provision provides:

• For purposes of this subsection,the total compensation of an employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of this Act.

Item 402(c)(2)(x) in turn provides that compensation is to be computed based upon

• "[t]he dollar value of total compensation for the covered fiscal year (column (j)). With respect to each named executive officer, disclose the sum of all amounts reported in columns (c) through (i).

Section 953(b), therefore, requires companies to include the same categories of payments in computing employee compensation as is used in computing CEO compensation.  Moreover, on this specific issue, Congress gave the Commission no discretion.  The statute provides that the Commission must use the version "in effect on the day before the date of enactment of this Act."

This has caused some to assert that the formula is too complicated for determining employee compensation.  Perqs, for example, may be harder to determine and compute for employees than for CEOs. 

To the extent true, however, the Commission in fact has considerable discretion to modify the formula in a way that makes it easier to determine.  While it is true that the Commission must use the language in effect on the day before enactment, that applies only to Item 402(c)(2)(x).  This provision defines the applicable categories that are included in total compensation.  What it does not do is limit the SEC's discretion in determining how each category should be computed with respect to employee compensation. 

The Commission retains the regulatory discretion to amend the other subsections of Item 402(c).  Thus, for example, the SEC could amend subsection (c)(2)(ix) (which defines the information required in column (i)) to specifically define the method of calculating perquisites when it comes to employees.  The Commission could, for example, impose a high threshold (CEOs have a threshold of $10,000), allow for averaging, or define certain types of benefits that can be excluded (those shared with other employees or those required by law).

In other words, unnecessary difficulties with the formula for calculating median employee compensation can be fixed in the rulemaking process by the Commission.  The Commission can do so by amending the provisions of Item 402(c)(2).

For a more detailed discussion on this issue and Section 953(b), see Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process.

Dodd Frank, Compensation Ratios, and Agency Discretion (Part 3)

We are discussing the regulatory discretion provided to the Commission in implementing ratio disclosure in Section 953(b) of Dodd-Frank.

Section 953 provides that ratio disclosure must occur in filing references in Item 10(a) of Regulation S-K.   The provision provides that:

• Registration statements under section 12, annual or other reports under sections 13 and 15(d), going-private transaction statements . . . , tender offer statements . . . , annual reports to security holders and proxy and information statements . . . and any other documents required to be filed under the Exchange Act, to the extent provided in the forms and rules under that Act.

To the extent ratio disclosure must occur in all of the filings in Item 10, it would require disclosure at least quarterly.  Of course the formula could be calculated once, disclosed and incorporated in all of the other filings by reference.   

More importantly, the Commission can simply amend Item 10 and eliminate references to periodic reports.  Such an amendment would not change the application of Regulation S-K to periodic reports.  The forms for quarterly and annual reports could still cross reference the regulation.  The result would be that companies would need to disclose ratio compensation only once a year in the proxy statement.  

Standing alone, the cross reference to Item 10 in Section 953 could stand for the proposition that ratio disclosure had to be included in any filing listed in that regulation at the time of enactment, effectively precluding the SEC from changing the frequency of disclosure. This is, analytically, unlikely to be the correct interpretation.  The statute cross references a regulation then imposes no limitations on changes in the regulation.  The logical interpretation is that Congress intended to allow the Commission to change the requirements by amending the regulation.

But the interpretation is not left only to logic.  Elsewhere in Section 953(b), Congress specifically referenced another regulation and instructed that the Commission use the version "in effect on the day before the date of enactment of this Act."  Dodd Frank, 953(b)(2).  In other words, where Congress wanted to limit the discretion of the Commission to change the applicable standards in a regulation, it did so expressly. 

The Commission can amend Item 10 of Regulation S-K and determine the frequency of ratio disclosure.

Frequency of disclosure can be whatever the SEC reasonably thinks appropriate (and consistent with the public interest) and the SEC has sufficient rulemaking authority to implement the preferred frequency.   

For a more detailed discussion on this issue and Section 953(b), see Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process.

Dodd Frank, Compensation Ratios, and Agency Discretion (Part 2)

Section 953(b) was sponsored by Senator Menendez of New Jersey and originally part of separate legislation.  The requirement to disclose compensation ratios was inserted into the Senate version of Dodd-Frank during committee deliberations.  The provision did not, however, generate any significant legislative history. 

Section 953(b) implemented the compensation ratio with some specificity.  The ratio had to be based upon a median rather than a mean.  Calculation of the employee median had to exclude the compensation paid to the CEO.  More directly, the statute spoke to the method of caculating median employee compensation and the frequency of disclosure.  The provision did so, however, not by explicitedly including the requirements in the statute but by cross referencing regulations adopted by the Commission. 

Specifically, Section 953(b) provided that ratio disclosure must appear in Item 402 of Regulation S-K (or its successor), the SEC provision defining executive compensation. Congress also referred to SEC regulations in defining the breadth of the disclosure requirement. Section 953(b) provided that ratio disclosure was to appear “in any filing of the issuer described in section 229.10(a).”  Finally, Section 953(b) prescribed the method for calculating employee compensation by referencing Item 402(c)(2)(x), the subsection that defined the CEO‟s total compensation.

We will discuss the impact of these references in the next post.  For a more detailed discussion on this issue and Section 953(b), see Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process. 

Dodd Frank, Compensation Ratios, and Agency Discretion (Part 1)

One of the sleeper provisions in Dodd-Frank was Section 953(b).  The provision, once implemented, requires public companies to disclose ratios that compare CEO compensation to the compensation of the median employee. We have posted on this provision before.

What we have not discussed is the implementation process.  The SEC has indicated that it intends to make a rule proposal about compensation ratios by the end of the year.  In considering an appropriate rule, reports have sufraced suggesting that some within the Commission view the Section as providing little administrative flexibility.  This has been a problem because some have argued that, under Section 953, the formula for calculating employee compensation is difficult to impliment and the ratio must be disclosed multiple times a year.  

In fact, the provision was written in a manner that provides extraordinary discretion to the SEC in formulating an appropriate approach.  Section 953(b) in at least three places refers not to other statutes but to regulations adopted by the Commission.  These references provide unexpected flexibility for the SEC in adopting any rule that implements the requirement.  We will explore this discretion in the next couple of posts. 

For a more detailed discussion on this issue and Section 953(b), see Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process.

Say on Pay and the First Year Results

The first year results are in for say on pay.  Most companies approved the compensation packages.  According to the WSJ, only 39 companies voted down the pay packages. Negative votes occurred a companies such as HP and Stanley Black & Decker. 

There are several observations that can be made about these results.   

First, they show that opposition to say on pay was overstated.  The newly acquired authority was not used by unions and public pension plans to extort additional, non-shareholder benefits.  This suggests that those using the same argument to opposed shareholder access are also overstating the risk.     

Second, the data shows that proxy advisory services do not have the disproportionate authority often assigned to them in the voting process.  As the article noted:  "Proxy advisory firms also didn't wield nearly the power over the votes that some had predicted. Institutional Shareholder Services recommended no votes for 298 companies so far this year."  While this does not quite contradict the observations of the Delaware Chancery Court in Yucaipa with respect to the power of proxy advisory firms, it comes closes.  See Yucaipa ("the reputable proxy solicitors who testified in this case both agree that Risk Metrics exercises a great deal of influence over the vote of many of its clients and that these clients often hold an important part of the available vote in contests.").

Third, the defeat of 39 pay packages understates the influence of say on pay.  It is probably just about the right number to make companies realize that there is some potential for embarrassing results.  As a result, they have an incentive to fix their pay packages before submission to shareholders.  In other words, the strength of say on pay is the discussion it engenders with shareholders and the prophylactic changes that are made in advance of shareholder approval. 

The data demonstrates that giving shareholders a bit more say on the governance of the company is healthy and appropriate.

The SEC and Investor Protection: Say on Pay and A Progress Report (Part 2)

One place where investor protection has received a positive bump has been in connection with the implementation of say on pay.  Say on pay provides shareholders with an advisory vote on executive compensation.  Although put in place during the TARP period for companies on the government dole, Congress mandated say on pay for all public companies in Dodd-Frank.

How has it been working?  According to Commissioner Aguilar, very well.  As he described in a recent speech:

• First, say-on-pay seems to have resulted in increased communication between shareholders and corporate management. Reports seem to indicate that both shareholders and corporate management are pro-actively initiating discussions regarding executive compensation, which is far from the predictions that say-on-pay would lead to disrepair or at best be ineffective

Moreover, the communication has gone beyond compensation issues.

• There seems to be real evidence that say-on-pay is one catalyst to increasing shareholder engagement more broadly. According to a recent study, the level of engagement is continuing to increase. Additionally, the study reported that 80% of the surveyed corporations said that the dialogue with investors was always or usually successful.

More than improving communications, say on pay has apparently had a salutary effect on compensation practices. 

• some pay practices appear to be changing in deference to shareholders’ views. Some companies have actually altered the pay and benefits of top executives. Many companies are putting in more performance-based compensation plans and they are addressing items that shareholders often criticized, such as: excessive severance; perks; federal income tax payments; and pensions. For example, approximately 40 of the Fortune 100 companies have eliminated policies that had the company pay certain tax liabilities of executives. As another example, General Electric modified the pay of its CEO two weeks prior in anticipation of the shareholder vote, deferring the vesting of certain options and conditioning the vesting on whether the company meets certain performance targets. According to news reports, this was apparently done to avoid losing a say-on-pay vote.

In other words, a shareholder advisory vote on compensation resulted in more communication with management and reforms in substantive compensation practices.

Say on pay, which has been around for most of a decade in some other countries, only arose in the United States after considerable shareholder effort.  Shareholder access is similar.  What one has to wonder, though, is whether these reforms would have been necessary had management been willing, in the first place, to communicate in a more meaningful way with shareholders and to reflect their views in the approach to compensation. 

In other words, the goal is more communication.  It suggests that if management wants to alleviate the pressure for additional shareholder oriented reforms, it should make certain that the communication spurred by say on pay leads to a broader discussion of shareholder interests.  To the extent this occurs, shareholders will have less need for additional governance reforms that are effectively designed to promote the same goal.

Director’s Compensation Project: Chesapeake Energy

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Chesapeake Energy (NYSE:CHK) 2011 Proxy Statement. According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Aubrey K. McClendon	975,000	16,804,500	--	3,265,452	21,044,952
Richard K. Davidson	146,500	305,125	--	168,813	620,438
Kathleen M. Eisbrenner	23,083	214,100	--	11,487	248,670
V. Burns Hargis	146,500	305,125	--	128,626	580,251
Frank Keating	143,000	305,125	--	175,318	623,443
Charles T. Maxwell	146,500	305,125	--	15,401	467,026
Merrill A. (“Pete”) Miller, Jr.	139,500	305,125	--	163,324	607,949
Don Nickles	146,500	305,125	--	138,691	590,316
Frederick B. Whittemore*	146,500	305,125	--	25,443	477,068

*Retired as a director in 2011 after the annual meeting.

Director Compensation

All of the directors were present at the 2010 annual meeting. There were four in-person meetings and nine telephonic meetings of the board during 2010. Each director attended at least 80% of those meetings. Mr. McClendon and Mr. Nickles attended 100% of the Board Meetings. Ms. Eisbrenner attended 100% of the meetings after her admittance to the board in December 2010. Every director, except Mr. McClendon because he is an employee, receives $15,000 for being physically present at a meeting and $3,500 for being present telephonically. The maximum amount a director can receive for attending meetings is $110,000 per year.

Director Tenure

The longest tenured board member is Mr. McClendon. He has served since co-founding Chesapeake Energy in 1989. Kathleen M. Eisbrenner is the shortest tenured board member, starting in December 2010. Several directors also sit on other boards. Mr. Davidson is on the board of Thayer/Hidden Creek. Governor Keating is an advisory director to Stewart Information Services Corporation. Mr. Miller serves as a director of National Oilwell Varco, Inc. Mr. Maxwell is a director of American DG Energy Inc., Daleco Resources Corporation, and Lescarden, Inc. Senator Nickles is also a director of Valero Energy Corporation, Washington Mutual Investors Fund, American Funds Tax Exempt Series 1, and JP Morgan Value Opportunities Fund.

CEO Compensation

Aubrey K. McClendon is a co-founder of the company and has served as its CEO since the company was founded in 1989. In 2010, his total compensation was $19,768,776. This compensation included a base salary of $975,000, a bonus of $1,951,000, and stock awards of $16,804,500. Per his employment agreement, Mr. McClendon’s compensation will remain at this level from 2006 through 2013. Mr. McClendon was given a $75 million well cost incentive award in 2008, contingent upon a five-year clawback period. Mr. McClendon’s “all other compensation” includes his bonus, use of the company aircraft, personal accounting, personal security, and the company’s contributions to his 401(k) plan.

Steven C. Dixon is the company’s Executive Vice President – Operations and Geosciences and COO. His total compensation in 2010 was $10,421,294, including a salary of $860,000, a bonus of $3,764,125, and stock awards in the amount of $5,099,200. Mr. Dixon’s “all other compensation” was $697,969 and included country club fees, financial advisement, use of the company aircraft, and the company’s contributions to his 401(k) plan. Mr. Dixon also received 210,000 shares as a stock award that was up from 165,000 shares in 2009.

The Director Compensation Project: Amazon.com, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Amazon.com, Inc. (NYSE:AMZN) 2011 Proxy Statement. According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Jeffrey P. Bezos	81,840	0	0	1,600,000	1,681,840
Tom A. Alberg	0	0	0	0	0
John Seely Brown	0	0	0	0	0
L. John Doerr	0	0	0	0	0
William B. Gordon	0	0	0	0	0
Alain Monie	0	0	0	0	0
Jonathan J. Rubinstein*	0	883,350	0	0	883,350
Thoman O. Ryder	0	0	0	0	0
Patricia Q. Stonesifer	0	0	0	0	0

*Mr. Rubinstein was the only director to be granted stock in 2010 and held 5,000 unvested restricted stock units as of December 31, 2010. At this date, Mr. Brown held 4,666 unvested restricted stock units from a previous year; Messrs. Gordon and. Monie each held 2,333 unvested restricted stock units.

Director Compensation.  During fiscal year 2010, Amazon, held 7 Board of Directors meetings and 23 Board Committee meetings.  Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and Board Committees on which he or she served.  All directors, except Mr. Gordon, attended the 2010 Annual Meeting of Shareholders.  In 1997, Amazon initiated a stock incentive plan as the means to compensate board members; Amazon also reimburses reasonable expenses for attending Board meetings.  The Nominating and Corporate Governance Committee recommends restricted stock unit awards to Board members, which vest in three equal annual installments.  The Board must approve these recommendations.  The first vesting occurs one year after election to the Board.  Directors do not receive additional stock for service on a committee.

Director Tenure.  Mr. Bezos has been Chairman of the Board since the company’s inception in 1994 and holds the longest tenure.  Mr. Alberg has the second longest tenure and has been a director since 1996.  The shortest tenured Board member is Mr. Rubinstein, who became a director in December of 2010.  Several directors also sit on other boards.  Mr. Ryder sits on the boards of Starwood Hotels & Resorts Worldwide, Inc., and Quad/Graphics, Inc.  He also served as Chairman of the Board for Virgin Mobile USA, Inc., and was a senior executive at Reader’s Digest.  Ms. Stonesifer served as Chair of the Board of Regents of the Smithsonian Institution and was Chief Executive Officer of the Bill and Melinda Gates Foundation.

CEO Compensation.  Mr. Bezos, who has served as Amazon’s Chief Executive Officer since May of 1996, earned a base salary of $81,840.  He was compensated $1,600,000 for security costs in 2010.  Mr. Bezos owns approximately 20% of Amazon’s shares outstanding and has never received compensation through stock. Amazon’s main form of compensation for named executive officers is stock based grants.  The Chief Financial Officer, Thomas Szkutak, made $160,000 and received 46,000 restricted stock units valued at $6,465,300.  The compensation for other named executive officers are only slightly different; Senior Vice President of International Retail, Diego Piacentini, received the same amount of stock and earns $175,000 in addition to $55,905 in expatriate benefits, which includes a housing and cost of living allowance and tax reimbursements. Senior Vice President of North American Retail, Jeffrey Wilke, received a stock compensation package of 50,000 restricted stock units valued at $7,027,500.

CFO Compensation

The WSJ has an interesting piece on CFO compensation. The article noted that median pay "for chief financial officers of S&P 500 companies surged 19% to $2.9 million last year, as profits and stock valuations rebounded and some finance chiefs assumed broader responsibilities".  Some received "less than $600,000" while other were paid "more than $60 million."  As the article noted, five CFOs "received more than $20 million in compensation.

There are several issues that arise out of this data.  First, CFO compensation has only been required to be reported for a few years.  The SEC used to required disclosure of CEO comp and the four highest paid officers.  That has been changed to the CEO and CFO and three highest paid officers.  See Item 402 of Regulation S-K (requiring disclosure of "All individuals serving as the registrant's principal financial officer or acting in a similar capacity during the last completed fiscal year ("PFO"), regardless of compensation level;").  CFOs, therefore, have a better basis for comparison.  One suspects that this has put upward pressure on CFO compensation.

Second, it would be interesting to determine who really sets CFO compensation.  While the board determines the compensation of the CEO, it is possible that in many cases the authority to determine compensation for other officers, including the CFO, has been delegated to the CEO.  To the extent concerns exist over CFO compensation, therefore, they would need to address the source of the compensation decision.

Third, it would likewise be of interest to see what if any correlation exits between CEO and CFO compensation.  It might be that the levels of CEO compensation are related to the level of compensation for other officers.  

The Director Compensation Project: Starbucks Corp.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Starbucks (NYSE:SBUX) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Barbara Bass*	0	0	271,258	0	271,258
William W. Bradley	82,500	0	169,542	0	252,042
Mellody Hobson	0	0	271,258	0	271,258
Kevin R. Johnson	110,000	0	135,633	0	245,633
Olden Lee	0	0	271,258	355,342**	626,600
Sheryl Sandberg	110,000	0	135,633	0	245,633
James G. Shennan, Jr.	110,000	0	135,633	0	245,633
Javier Teruel	0	0	271,258	0	271,258
Myron E. Ullman, III	0	0	271,258	0	271,258
Craig E. Weatherup	0	0	271,258	0	271,258

* Ms. Bass will be retiring from the board as of the conclusion of the 2011 annual meeting reducing the size of the board to ten members.

** Mr. Lee was paid $50,000 per month as a consulting fee and reimbursed  expenses incurred in the course of his service under the agreement, including $23,315 for airfare, $25,678 for lodging and $6,349 for car rental and taxi service.

Director Compensation.  During fiscal year 2010, Starbucks held 11 Board of Directors meetings and 24 Board Committee meetings.  Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the Board Committees on which he or she served.  In June 2010, the board elected to increase non-employee director compensation to $240,000 for the 2011 fiscal year, after reducing it to $220,000 in 2010.  This includes a retainer of $120,000 and stock options of $120,000, which were increased equally. 

Director Tenure.  In 2010, Mr. Schultz, who has held his position as chairman of the Board of Directors since 1985, had the longest tenure.  Mr. Shennan has been a member of the board since March 1990, and Mr. Weatherup has held his position since February 1999.  Mr. Johnson and Ms. Sandberg have the shortest tenures having been members since March 2009.  Several directors also sit on other boards.  Ms. Sandberg has served as Chief Operating Officer of Facebook Inc., and she also currently serves on the board of directors of The Walt Disney Company.  Mr. Bradley served in the U.S. Senate for 18 years representing the state of New Jersey, and currently serves on the boards of directors of Willis Group Holdings Limited and QuinStreet, Inc.

CEO Compensation.  Howard Schultz served as Starbucks Chairman, President and Chief Executive Officer for the fiscal year 2010.  The majority of Starbucks executive compensation is performance awards based on primary and secondary individual performance goals, relating to achieving operating income and earnings per share objectives respectively.  In 2010 nearly every executive met or exceeded their objective goals and received 200% of their target bonus.  Mr. Shultz received compensation of $21,733,013 with a base salary of $1,280,804.  President of Starbucks coffee U.S., Mr. Burrows, received compensation of $3,790,345 with a base salary of $663,154.  Starbucks pays for Mr. Shultz’ security costs which were $680,961 in 2009; in 2010 he reimbursed the company part of his security costs resulting in an aggregate cost of $210,268.  Starbucks pays for their executives’ insurance and disability premiums as well as annual physical examinations.  Fiscal year 2010 is the first effective year of Starbucks Recovery of Incentive Compensation Policy.  It allows the company to recoup executive bonus awards which were based upon fraudulent financial results or are now incorrect due to a material negative restatement.

The Director Compensation Project: Morgan Stanley

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Morgan Stanley (NYSE:MS) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Roy J. Bostock	58,750	250,000	0	0	308,750
Erskine B. Bowles	58,750	250,000	0	0	308,750
Howard J. Davies	70,833	250,000	0	0	320,833
James H. Hance, Jr.	66,667	250,000	0	0	316,667
C. Robert Kidder	72,917	250,000	0	0	322,917
Donald T. Nicolaisen	68,333	250,000	0	0	318,333
Charles H. Noski*	-	-	0	0	-
Huthum S. Olayan	49,583	250,000	0	0	299,583
Charles E. Phillips, Jr.*	-	-	0	0	-
O. Griffith Sexton	52,500	250,000	0	0	302,500
Laura D. Tyson	55,417	250,000	0	0	305,417

* Mr. Noski resigned from the Board effective April 13, 2010, and Mr. Phillips did not stand for election at the 2010 annual meeting of shareholders on May 18, 2010.

Director Compensation.  During fiscal year 2010, Morgan Stanley held 15 Board of Directors meetings and 35 Board Committee meetings.  Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the Board Committees on which he or she served.  Each director receives an annual retainer of $75,000.  Board Committee chairs and Board Committee members receive additional annual retainers of up to $30,000 per committee.  There are four committees: Risk; Audit; Nominating and Governance; and Compensations, Management Development and Succession.  Mr. Kidder receives $50,000 in additional retainers through committee membership; Mr. Nicolaisen receives $40,000; Mr. Davies receives $35,000; Mr. Hance receives $25,000; Dr. Tyson and Messrs. Bowles and Bostock receive $20,000; Mr. Sexton receives $15,000 and Ms. Olayan receives $10,000.

Director Tenure.  Mr. Kidder is the director with the longest tenure, he has been on the board since 1993.  Mr. Owens is the newest director, he joined the board in 2011.  Several directors also sit on other boards.  Mr. Hance sits on the boards of Cousins Properties Incorporated, Duke Energy Corporation, Ford Motor Company, and Sprint Nextel Corporation; Mr. Hance has served on the boards of EnPro Industries Inc. and Rayonier Corporation in the past five years.  Mr. Bostock serves as the Non-Executive Vice Chairman of the board for Delta Air Lines, Inc. and as the Non-Executive Chairman of the board for Yahoo! Inc.  

CEO Compensation.  James Gorman, who served as Morgan Stanley’s Chief Executive Officer during the fiscal year 2010, earned $15,185,737 in total compensation.  Ruth Porat served as the Executive Vice President and Chief Financial Officer over the same time and was compensated $11,710,425.  Both Mr. Gorman and Ms. Porat started at these positions on January 1, 2010, along with Mr. Chammah who became Chief Executive Officer of Morgan Stanley International.  As of January 2011, Mr. Chammah is no longer an executive officer after changing his role to Chairman of Morgan Stanley International.  Mr. Chammah was paid $502,302 related to his modified expatriate package received for transferring to the UK and an estimated expatriate equalization payment of $622,609 related to taxes.  These payments include costs related to financial and tax planning and personal use of a car and driver.  Former Chief Operating Officer, Mr. Thomas Nides, was paid $75,104 for travel between his home in Washington D.C. and the Company’s offices in New York.  This includes airfare, car services, and housing accommodations.

The Director Compensation Project: Google Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Google (NYSE:GOOG) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
L. John Doerr	75,000	358,187	0	0	433,187
John L. Hennessy	75,000	358,187	0	0	433,187
Ann Mather	0	507,915	0	0	507,915
Paul S. Otellini	75,000	358,187	0	0	433,187
K. Ram Shriram	0	0	0	0	0
Shirley M. Tilghman	0	504,206	0	0	504,206
Eric E. Schmidt*	0	0	0	0	0
Sergey Brin*	0	0	0	0	0
Larry Page*	0	0	0	0	0

*Google’s employee directors, Mr. Schmidt, Mr. Page, and Mr. Brin, did not receive any compensation for their services as members on the board of directors in 2010.

Director Compensation.  During fiscal year 2010, Google held seven Board of Directors meetings and 29 Board Committee meetings.  Each director attended at least 80% of all board of directors and applicable committee meetings and six directors attended the Annual Meeting of Stockholders.  The company’s standard compensation for non-employee directors is a $350,000 Google Stock Unit grant in addition to an annual $75,000 cash retainer.

Director Tenure.   As founders, Mr. Page and Mr. Brin, have served on Google’s board of directors since its inception in September 1998.  Mr. Shriram has also served on the board of directors since September 1998.  Mr. Schmidt, who is now the Executive Chairman of the board of directors, has also served on the boards of Novell Inc., Apple Inc., and Seibel Systems Inc.  Ms. Mather has been a director since November 2005; she also serves on the boards of Glu Mobile Inc., MGM Holdings Inc., MoneyGram International, and Netflix Inc.  Mr. Hennessy is the President of Stanford University and also sits on the board of Cisco Systems, Inc.  Ms. Tilghman is the President of Princeton University.    

CEO Compensation. Presidents and founders, Mr. Page and Mr. Brin, have voluntarily elected to receive base salaries of $1.  Chief Executive Officer, Mr. Schmidt, also receives a base salary of $1, but was reimbursed $311,433 in security costs and aircraft charters on which friends and family flew.  As significant stockholders, their personal wealth is directly linked to continual stock price appreciation.  Mr. Page and Mr. Brin each own over 27 million shares of common stock, while Mr. Schmidt owns over 9 million shares.  Mr. Schmidt, beneficially owns one aircraft and one third of another aircraft that are used by Google executive officers for business trips.  The board of directors approved an hourly reimbursement rate of $7,500 to Mr. Schmidt.  In sum he was reimbursed $1.2 million in 2010.  Chief Financial Officer, Mr. Pichette, had a base salary of $492,115 and received total compensation of $22,607,152 during 2010.

The Director Compensation Project: AT&T, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.  

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from AT&T (NYSE:T) 2011 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
William F. Aldinger III*	48,533	0	0	256,281	304,814
Gilbert F. Amelio	141,167	127,500	765	4,884	274,316
Reuben V. Anderson	130,367	127,500	56,382	2,806	317,055
James H. Blanchard	133,000	127,500	50,333	6,260	317,093
August A.Busch III*	39,100	0	0	290,749	329,849
Jaime Chico Pardo	129,400	127,500	0	15,102	272,002
James P. Kelly	135,100	127,500	35	3,755	266,390
Jon C. Madonna	170,033	127,500	0	7,168	304,701
Lynn M. Martin	130,850	127,500	0	14,757	273,107
John B. McCoy	131,000	127,500	0	7,073	265,573
Mary S. Metz*	39,433	0	2,242	267,974	309,649
Joyce M. Roché	116,600	127,500	0	24,078	268,178
Matthew K. Rose**	30,333	0	0	26	30,359
Laura D’Andrea Tyson	128,800	127,500	1,768	6,177	264,245
Patricia P. Upton	121,200	127,500	24,148	4,314	277,162

*Compensation amount reflects fees earned through retirement date.

**Joined board in September 2010.

 
Director Compensation.
All of the directors were present at the 2010 annual meeting, and they all attended at least 75% of the meetings of the board and committees on which each served. Non-employee directors receive an annual retainer of $85,000, together with $2,000 for each board meeting or corporate strategy session attended. Directors receive additional compensation of $1,700 for each committee meeting attended in person, except members of the Audit and Human Resources Committee. Those directors receive $2,000 for each committee meeting attended. The Chairperson of each committee receives an additional retainer of $10,000, except for the Chairpersons of the Audit and Human Resources Committee who each receive an additional annual retainer of $25,000.

Director Tenure.
Ms. Upton has been a director of AT&T since 1993 and has the longest tenure on the board. Mr. Rose has the shortest tenure and has been a director of AT&T since September 2010. Mr. Kelly and Mr. Anderson were directors of Dana Corporation and Mississippi Chemical Corporation, respectively, preceding each of the company’s bankruptcy filings. Several directors also sit on other boards. Mr. Rose is a director of AMR Corporation, BNSF Railway Company, and Burlington Northern Sante Fe, LLC. Mr. Blanchard is also a director of Synovus Financial Corp. and Total System Services, Inc. Mr. Chico is on the board of CICSA, Honeywell International, Inc., and IDEAL. Ms. Roché is a director of Dr. Pepper Snapple Group, Inc., Macy’s, Inc, and Tupperware Brands Corporation.

CEO Compensation.
Randall L. Stephenson began his career with AT&T in 1982, and he has been the Chief Executive Officer and Chairman of the board since 2007. Prior to becoming the CEO, he was AT&T’s Chief Operating Officer from 2004 to 2007 and Chief Financial Officer from 2001 to 2004. Mr. Stephenson’s total compensation for 2010 was $27,341,628 $1.9 million less than the previous year. Mr. Stephenson held 1,292,248 shares of stock options in 2010, and he was also entitled to benefits such as personal use of private jets, auto benefits, club memberships, life insurance, and home security. Richard G. Lindner has been the President and Chief Financial Officer of AT&T since 2004, and he was previously the CFO for AT&T Mobility. In 2010, he received a salary of $829,167, stock awards of $4,250,009, and total compensation of $8,699,999. He received personal benefits in the amount of $72,257, including relocation costs, financial counseling, auto benefits, and club memberships.

The Director Compensation Project: Berkshire Hathaway, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.  

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Berkshire Hathaway (NYSE: BRKA) 2011 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Warren E. Buffet	100,000	0	0	424,946	524,946
Howard G. Buffet	2,700	0	0	0	2,700
Stephen B. Burke	2,700	0	0	0	2,700
Susan L. Decker	2,700	0	0	0	2,700
William H. Gates III	2,700	0	0	0	2,700
David S. Gottesman	2,700	0	0	0	2,700
Charlotte Guyman	6,700	0	0	0	6,700
Donald R. Keough	4,000	0	0	0	4,000
Charles T. Munger	100,000	0	0	0	100,000
Thomas S. Murphy	6,700	0	0	0	6,700
Ronald L. Olson	2,700	0	0	0	2,700
Walter Scott, Jr.	2,700	0	0	0	2,700

Director Compensation.
In 2010, the board held an annual meeting of directors, an annual meeting of shareholders, and two special meetings. Each director attended all meetings of the board and of the committees on which he or she served except for Mr. Keough. Mr. Keough was absent from the annual meeting of the board of directors, the two special meetings, and three of the five Audit Committee meetings due to illness. Because Mr. Warren E. Buffet and Mr. Munger are employees, they do not receive fees for attendance at directors’ meetings. The remaining directors are not employees or spouses of employees and they each receive a fee of $900 for each meeting attended in person and $300 for participating in any meeting conducted by telephone. A director who serves as a member of the Audit Committee receives a quarterly fee of $1,000. Directors are reimbursed for their out-of-pocket expenses incurred in attending meetings of directors or shareholders.

Director Tenure.
Mr. Warren Buffet has been a director of the Corporation since 1965 and has been its Chairman and Chief Executive Officer since 1970. The director with the shortest tenure is Mr. Burke,he has been a director since 2009. Several directors also sit on other boards. Mr. Howard Buffett is a director of The Coca-Cola Company and Lindsay Corporation. Mr. Burke is the Chairman of the Children’s Hospital of Philadelphia and a director of JPMorgan Chase and Co. Ms. Decker sits on the boards of Intel Corporation, Costco Wholesale Corporation and LegalZoom. Mr. Gates is serves on the board of directors for Microsoft Corporation and is Co-chair of the Bill & Melinda Gates Foundation. Mr. Keough is a director of Allen & Company, InterActive Corp., and The Coca-Cola Company. Mr. Munger is a director of Wesco Financial Corporation, Daily Journal Corporation, and Costco Wholesale Corporation. Mr. Olson is a director of City National Corporation, Edison International, Southern California Edison and The Washington Post Company. Mr. Scott is a director of Level 3 Communications, Peter Kiewit Sons’ Inc., and Valmont Industries Inc.

CEO Compensation.
Mr. Buffett’s annual compensation has been $100,000 for more than 25 years, and Mr. Buffett has requested that his compensation remain at this level in the future. For the past four years, Berkshire has provided personal and home security services for Mr. Buffett, and the amount of these services was $349,946 in 2010. Marc D. Hamburg has been Berkshire’s Senior Vice President and Chief Financial Officer since 1992. His annual salary in 2010 was $912,500, a 5.5% increase from 2009, and he received $12,250 towards a subsidiary’s defined contribution plan.

The Director Compensation Project: Goldman Sachs Group, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.  

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Goldman Sachs Group (NYSE:GS) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Lloyd C. Blankfein	6,000,000	7,650,013	0	464,067	14,116,423
John H. Bryan	0	100,204	375,800	20,000	496,004
Claes Dahlbäck	0	267,776	187,900	0	455,676
J. Michael Evans	6,000,000	7,650,013	0	277,165	13,927,508
Stephen Friedman	0	100,204	375,800	0	476,004
William W. George	0	267,776	187,900	20,000	475,676
Rajat K. Gupta*	0	75,076	375,800	0	450,876
James A. Johnson	0	100,204	375,800	19,559	495,563
Lois D. Juliber	0	267,776	187,900	20,000	475,676
Lakshmi N. Mittal	0	75,076	375,800	0	450,876
James J. Schiro	0	307,087	0	20,000	327,087
H. Lee Scott, Jr.**	0	0	0	0	0
Ruth J. Simmons*	0	75,076	375,800	0	450,876
John S. Weinberg	6,000,000	7,650,013	0	158,511	13,810,735

* Retired from the board in May 2010.

** Received prorated compensation for 2010 in early 2011.

Director Compensation.
All directors attended the annual meeting in 2010, and the directors each attended at least 75% of the meetings of the board and the committees on which he or she served. Overall attendance at board and committee meetings during 2010 averaged 98.5%. Independent directors do not receive any fees for attending board or committee meetings.

Director Tenure.
Mr. Johnson holds the board’s longest tenure and has been a director since May 1999. Mr. Schiro has the shortest tenure and began serving on the board in 2009. Several directors also sit on other boards.  Mr. George is a director of Exxon Mobile Corporation. Mr. Johnson is a director of Forestar Group Inc. and Target Corporation. Ms. Juliber is a director of E.I. du Pont de Nemours and Company and Kraft Foods Inc. Mr. Mittal is a director of European Aeronautic Defence and Space Company EADS N.V. Mr. Schiro is a director of PepsiCo, Inc., REVA Medical, Inc. and Royal Philips Electronics.

CEO Compensation.
The following individuals each received bonuses of $5.4 million in 2010: Mr. Blankfein, CEO; Gary D. Cohn, COO; David A. Viniar, CFO; J. Michael Evans, Vice Chairman; and John S. Weinberg, Vice Chairman.

Mr. Blankfein has been the Chairman and Chief Executive Officer of the Goldman Sachs Group since April 2003, and he has worked in other capacities for the company for 25 years. Mr. Blankfein received $128,676 for security, and he is authorized to use corporate aircraft for personal use. Goldman Sachs has created Employee Funds (private investment funds) and Mr. Blankenfein received $27.2 million in Employee Funds in 2010. The CFO is David A. Viniar and his total compensation for 2010 was $13,958,011. He has been the CFO since May 1999. He received $73,390 for security and he is also authorized to use corporate aircraft for personal use.

The Director Compensation Project: Hewlett-Packard Company

The Director Compensation Project: Hewlett-Packard Company

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

The director compensation table from Hewlett-Packard Company’s (NYSE:HPQ) 2011 proxy statement is listed below. The company determined that each director is independent, except for Mr. Apotheker, who is President and CEO of HP.  According to the proxy statement, the company paid the directors the following amounts: 

Director Compensation Table:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Marc L. Andreesen	36,000	389,633	0	8,677	434,310
Lawrence T. Babbio, Jr	203,333	87,540	87,250	0	378,123
Sari M. Baldauf	168,000	87,540	87,250	0	342,790
Rjiv L. Gupta	156,000	175,027	0	29,926	360,953
John H. Hammergren	82,000	137,533	137,094	29,981	386,608
Joel Z. Hyatt	90,667	275,012	0	19,723	385,402
John R. Joyce	146,000	175,027	0	0	321,027
Robert L. Ryan	255,333	175,027	0	28,389	458,749
Lucille S. Salhany	184,000	87,540	87,250	16,113	374,903
G. Kennedy Thompson	96,000	275,012	0	0	371,012

*Compensation amount reflects fees earned through retirement date.

Director Compensation. Throughout the 2010 fiscal year, HP held 34 board meetings, of which 17 were executive sessions.  Each director received a $100,000 cash retainer or could elect to receive an equivalent amount of securities instead of the cash retainer.  Each director also received a $150,000 equity retainer, which HP raised to $175,000 beginning March 2010. Committee chairs received an additional retainer ranging from $10,000 to $20,000. Each director also received $2,000 for attending more than six board or committee meetings per year.  HP reimburses directors for their expenses in connection with board meetings, allows them to use the company aircraft to travel to and from HP events, and allows each director to contribute up to $100,000 worth of HP products to a school or charity each year.  To contribute products, the director must pay 25% of the list price of the products and HP contributes the remaining cost.

Director Tenure.  The longest tenure of any director is Lawrence T. Babbio, Jr., who has served since 2002.  HP recently added several new directors. Mr. Apotheker and Mr. Lane were elected by the board to serve as directors effective November 1, 2010. Mr. Banerji, Mr. Reiner, Ms. Russo, Ms. Senequier, and Ms. Whitman were elected by the board to serve as directors effective January 21, 2011.  Certain directors also serve on additional boards. Ms. Baldauf is a director of Daimler AG and three companies headquartered in Finland.  Mr. Gupta is a director of Tyco International Ltd., The Vanguard Group, and several private companies.  Ms. Russo is a director of General Motors Company, Merck & Co., Inc., and Alcoa Inc.

Executive Compensation.  During fiscal year 2010, the highest paid executive was Mark V. Hurd, CEO and President of HP. In 2010, Mr. Hurd’s total compensation package was $23,863,744, of which salary accounted for $1,121,944.  Ann M. Livermore, the Executive Vice President of HP Enterprise Business, was the second highest paid executive, earning a salary of $748,000 and total compensation worth $9,4640,041 during 2010. On August 26, 2010, Mr. Hurd resigned as CEO and all of his outstanding equity awards were cancelled as a result of litigation commenced by HP against Mr. Hurd. On September 29, 2010, Leo Apotheker entered into a four-year employment contract with HP to replace Mr. Hurd.  He will receive a base salary of $1.2 million, a target annual bonus of 200% of his base salary, and long-term incentive short-term share incentives.  In addition, on November 29, 2010, Mr. Apotheker received a cash signing bonus of $4 million, a pro rata portion of which he must re-pay if he resigns or is terminated for cause within 18 months. Mr. Apotheker also received an additional cash payment of $4.6 million as reimbursement for foregone non-competition payments from his former employer and to cover relocation expenses.

The Director Compensation Project: Verizon Communications, Inc.

The Director Compensation Project: Verizon Communications, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

The director compensation table from Verizon Communications Inc.’s (NYSE:VZ) 2011 proxy statement is listed below. According to the proxy statement, the company paid the directors the following amounts: 

Director Compensation Table.

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Richard L. Carrión	91,000	130,000	0	0	225,318
M. Frances Keeth	111,000	130,000	0	0	241,000
Robert W. Lane	97,000	130,000	0	0	228,947
Sandra O. Moose	114,000	130,000	0	0	247,398
Joseph Neubauer	106,000	130,000	0	0	236,000
Donald T. Nicolaisen	122,000	130,000	0	0	252,000
Thomas H. O'Brien	99,000	130,000	0	0	229,671
Clarence Otis, Jr.	99,000	130,000	0	0	231,728
Hugh B. Price	103,000	130,000	0	0	233,047
Rodney E. Slater	74,833	196,023	0	0	270,856
John W. Snow	89,000	130,000	0	0	219,000
John R. Stafford	103,000	130,000	0	0	241,772

Director Compensation.  Verizon’s board met 10 times in 2010, seven meetings were regularly scheduled and three were special meetings.  Every director proposed for election in 2011 attended at least 75% of the total board and committee meetings to which the director was assigned.  Overall, the board and committee meeting attendance average was 98%.  All directors received $130,000 as an annual stock award, except for Mr. Slater.  Mr. Slater received a stock award of $108,333, which was prorated to reflect the portion of the year that he served on the board.  Mr. Slater also received a one-time grant of 3,000 Verizon share equivalents with a fair value of $87,690.  Directors who were elected to the board before 1992 and directors who served as directors for NYNEX Corporation participate in a charitable giving program that provides an aggregate contribution of $1,000,000 payable in ten annual installments and commences when a director retires or turns 65 years of age.

Director Tenure.   The tenure of Verizon directors ranges from over fifteen years to only a couples of months, but the majority of the board members have served for several years.  Three directors served as directors of NYNEX Corporation and they are eligible for the retirement program.  Joseph Neubauer is Verizon’s longest tenured director and has been a director of Macy’s, Inc since 1992. Within the past five years, Mr. Neubauer has served as director of both Wachovia Corporation and CIGNA Corporation. He has also served as the chairman of the board of ARAMARK Corporation.  The director with the shortest tenure is Lowell C. McAdam.  He does not serve on any other boards, but is Verizon’s President and Chief Operating Officer.

Executive Compensation.  Ivan G. Seidenberg, Chairman and CEO of Verizon, the highest paid executive in 2010, earned a $2,100,000 salary and total compensation worth $18,166,006.  The second highest paid executive was John F. Killian, the former Executive Vice President and CFO of Verizon, earning an $825,000 salary and total compensation worth $7,404,755 in 2010.  President and COO, . Mr. McAdam, Executive Vice President and President and CEO of Verizon Wireless Joint Venture Mr. Mead, and Executive Vice President and Chief Financial Officer Mr. Shammo all received increases in base pay due to promotions in 2010. None of the salaries’ of other executive members increased in 2010.  Mr. Seidenberg and Mr. McAdam were the only executives that used the company aircraft in 2010.