November 17, 2006
Director Fees: Timing of Payments and Related Disclosure Issues
Recently, a member asked whether most companies pay their annual board retainers in monthly or quarterly installments or in a single lump payment? My sense is that for meeting fees, they are paid following each meeting (often as part of the next check) – and companies often pay the annual retainer in quarterly installments, but sometimes in an annual installment (sometimes in advance, but often in arrears). Many companies utilize a “compensation year” for director fee purposes that begins after each annual shareholders meeting. Essentially, there is no standard practice and companies often make changes to their fee payment schedule without regard to their fiscal year.
Also, most companies “1099” the fees, while others W-2 them. The difference impacts whether the company withholds taxes on option exercises; “1099” means no withholding on option exercises or restricted stock vesting.
So you ask, “why should we care when we pay directors?” Or more specifically, “does the timing of director fees impact what – and when – we need to disclose under the SEC’s new compensation rules?”
The answer from Brink Dickerson of Troutman Sanders: Sort of. Let’s say that a company in 2005 decided to pay an annual retainer of $60,000 based upon a compensation year that began in April at the annual meeting and continued until the annual meeting in April 2006, at which they decided to pay $72,000. Under the old rules the 2007 proxy statement would report that directors receive an annual retainer of $72,000 (and under the new rules it may say that too). But the table is going to reflect what actually was paid.
Let’s say that the practice is to pay the retainer based upon fiscal quarters in arrears. So, in 2006 a director would have received $15,000 in January, $15,000 in April, $18,000 in July and $18,000 in October, for a total of $76,000. Let’s say that it is paid in six installments at the actual board meetings. That will result in an even different number. Let’s say it is paid in advance…
Former Directors – Subject to Disclosure?
On CompensationStandards.com, Mark Borges continues to blog about interpretations of the SEC’s new executive compensation rules. For example, here is a recent entry: “Last month, I blogged about whether the compensation of a director who resigns or otherwise leaves the board of directors of a company before the end of the fiscal year needed to be included in the Director Compensation Table. At the time, I said I simply wasn’t sure, as I could read the new rules both ways.
At a recent conference, I was on a panel with Corp Fin Staffer Anne Krauskopf who confirmed that these individuals are subject to disclosure, even though they may not be members of the board at the end of the last fiscal year. Essentially, she agreed with my analysis that Item 402(k)(1) places the focus on the total compensation paid to the board for the year, rather than on the individual amounts received by the current board members. Thus, each person serving as a director at any time during the last completed fiscal year should be included in the table.”
Institutional Investors Seek Disclosure of Compensation Consultant Conflicts
Under the SEC’s new executive compensation rules, companies are required to identify the use of any compensation consultants and describe their compensation-related work. A group of large institutional investors, which control nearly $850 billion in assets, have sent a letter to the 25 largest US companies asking them to disclose more about their compensation consultants than required under the SEC’s new rules. In particular, these investors want to know:
– Does their compensation consultant provide other services?
– Do they have a policy prohibiting this?
This request is akin to what this group of investors (and a few others) commented upon earlier this year, as noted in footnote 495 of the SEC’s adopting release. It will be interesting to see how many companies comply with the request. We have posted a copy of the letter from these investors in our “Outside Advisor Use” Practice Area on CompensationStandards.com.