The best-paying director's chairs
Minneapolis / St. Paul Business Journal - by Elizabeth Millard Contributing Writer
For the first time, the Business Journal has been able to rank the 100 highest-compensated directors on the boards of public, Minnesota-based companies.
In the wake of corporate scandals and the Sarbanes-Oxley Act, new Securities and Exchange Commission disclosure rules have shed brighter light on how corporate directors are compensated. Proxy statements -- which previously outlined components of board pay without revealing how many meetings a director attended or what their options were worth -- now detail total compensation, in specific, for each director.
Ranking No. 1 on the Top 100 Board Compensation list is William Cooper, chairman of TCF Financial Corp. Most of the directors on the list serve on more than one board, but five appear twice on the Top 100: Douglas Leatherdale, with UnitedHealth Group and Xcel Energy Inc.; Thomas Madison, with Digital River Inc. and Rimage Corp.; Larry Barenbaum, with Christopher & Banks Corp. and Lakes Entertainment Inc.; Charles Haggerty, with Imation Corp. and Pentair Inc.; and Thomas Timbie, with American Medical Systems Holdings Inc. and ev3 Inc.
Overall, the Top 100 directors in total compensation range from Cooper, at $2.9 million, to U.S. Bancorp director Craig Schnuck, who receives about $204,000 in cash, stock and options.
The directors who've landed on the list vary in terms of compensation packages, but most have a blend of cash, stock awards and option awards for their service in helping companies to perform more efficiently and address long-term strategy issues.
There are several ways to compensate directors, from tying compensation to company performance, to paying only cash fees for meeting attendance, to creating a mix of stock and cash.
One high-profile strategy has been employed by The Coca-Cola Co., which recently adopted a program that pays directors in the same way as executives, creating a connection between earnings performance and annual compensation.
But that strategy is still fairly unusual, said John Stout, an attorney at Minneapolis-based Fredrikson & Byron who specializes in corporate governance. Some firms do offer shares that vest if certain performance goals are met, but they're usually offered in conjunction with cash.
In the past, director perks such as life insurance, charitable donations and even rides on the company jet used to be commonplace, but those days are nearly gone, said Stout, who also is chairman of the Minnesota chapter of the National Association of Corporate Directors. "Those are out of favor for the same reason that executive perks are no longer as popular," he noted. "It just doesn't look very good."
Although director compensation hasn't been scrutinized as much as executive pay, bonuses and perks, there is increasing attention paid to the issue by shareholders.
"If someone says they're on a board to align with the interest of shareholders, and then walks away with $10 million, those shareholders are going to say, 'Wow, that's a lot of money, what are you doing to deserve that?' " Stout said.
The Midwest has fewer compensation issues compared with the East and West coasts, he noted, but that might have to do with the temperament of its citizens, as well as the prevalence of larger companies in other parts of the country. "People in this region may be a little more restrained," he said.
In general, both in the state and nationally, there's more of a tendency to separate performance from director compensation, said Phil Garon, an attorney at Faegre & Benson in Minneapolis. "Some believe that they shouldn't be connected at all, that directors should just be paid in cash," he said. "The theory is that the directors are there to improve performance but also to make sure the company is complying with laws."
Role playing
Board directors fulfill several roles for a company, noted TCF's Cooper. The most important, he said, is to hire a CEO if one is needed, and just as importantly, make the decision to fire one if that person is not working as expected.
Other decisions that directors help to make include mergers and acquisitions, any other major transactions that affect the lifeblood of the corporation, and industry shifts that might determine the company's long-term prospects.
"In my opinion, it's not the board's role to run the company," Cooper said. "But the board has to be fully aware of what's going on in the company, and get the data necessary for that understanding."
Tying compensation too closely to performance can be a difficult situation, he said: "If officers and directors are too much aligned with management, then the board may make certain financial decisions simply to reach a certain outcome and hit specific goals, because it's in their best financial interest."
Such a tactic might not make boards into the advocates for shareholders that they should be, Cooper noted.
At TCF, management is compensated for achievement of goals, but the board is compensated primarily for attending meetings, and directors also receive a retainer fee. They also get stock that vests based on the achievement of equity goals, but if the company doesn't reach those markers, directors don't get the stock.
"Our structure is such that we're aligned with management through the vested stock, but not too much aligned," Cooper said. At TCF, the stock is not such a significant part of the overall compensation package that it would affect how directors act, he said.
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