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.

The ABA has just published its list of 100 law blogs, a list that includes the Race to the Bottom.  Please register and vote for the RTTB.