Outsize pay for chief executive officers has been a bone of contention among shareholder activists for years. What’s less known is that the directors on board-compensation committees — the very people who decide to give out those large CEO salaries, bonuses, and stock grants — also tend to pay themselves and other directors extremely well.
Regeneron Pharmaceuticals Inc.’s eight nonexecutive directors received average annual compensation of $1.9 million in stock and cash last year, making them the highest-paid board members at businesses in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg from company filings. They met seven times.
Directors at Endo International Plc made an average of $1.4 million. Board members at more than a dozen other companies pulled in from $500,000 to $1 million. In exchange for those big numbers (the median for all S&P 500 companies is $256,565), directors meet an average of eight times a year in day-long sessions.
“The challenge is to compensate directors well, but not so well that pay becomes a primary reason for their service,” said Scott Stringer, New York City comptroller and custodian of the city’s pension funds, with over $160 billion in assets. “When you cross that line, you risk compromising the directors’ independence.”
Directors typically decide their own compensation with little shareholder review, and the money is so good they’re often reluctant to relinquish their seats, according to Gary Hewitt, director of governance research at Amsterdam-based Sustainalytics, which provides research to investors.
“Beyond the smell of self-dealing with their pay, directors may find their interests in getting the ongoing board fees a bit stronger than their willingness to rock the boat,” Hewitt said.
At Regeneron, which makes drugs to treat macular degeneration and other diseases, five of the eight outside directors have each served for more than 20 years. Four of the top 10 highest-paid boards at the 500 businesses Bloomberg surveyed are at biotechnology companies where stock-option grants boost director compensation.
Among them: Regeneron, Endo and Vertex Pharmaceuticals Inc., whose directors averaged $920,509. Options in these companies often are granted at low strike prices before drugs are developed and approved, then jump in value after successful trials.
The options Regeneron’s nonexecutive chairman, Roy Vagelos, has received over his 21-year tenure have helped him to become a billionaire. Regeneron valued his 2014 awards at $20.5 million.
“Our board compensation reflects Regeneron’s unparalleled track record of success,” said spokeswoman Hala Mirza. Vertex and Endo declined to comment.
Some companies with highly paid boards have tiered share structures that give much of the voting power to insiders, insulating directors from potential investor action. More than 50 percent of the votes at Google Inc. parent, Alphabet Inc., are controlled by founders Sergey Brin and Larry Page. Google directors received average compensation of $500,498 last year.
At Comcast Corp., which paid outside directors an average of $496,785, CEO Brian Roberts controls 100 percent of a share class that gives him 33.3 percent of the company’s votes. Google and Comcast declined to comment.
‘Locked Into Management’
“Directors at these dual-tiered stock companies are locked into management to begin with, and their high pay only adds to that,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
Not all directors are paid lavishly. Berkshire Hathaway Inc.’s directors received average compensation of just $3,991 last year, making them the lowest paid among S&P 500 companies, Bloomberg found. They received $900 for each meeting they attended in person and $300 for participating by telephone; they didn’t receive shares for their time.
Shareholders have challenged directors’ freedom to set their own compensation. The Delaware Court of Chancery ruled in May that directors on compensation committees who approve their own pay aren’t protected by the business-judgment rule and can be sued by investors. The rule typically shields directors from liability for decisions they made in good faith and didn’t have a personal interest in.
A Facebook Inc. shareholder later filed suit, alleging the company improperly allowed directors to award themselves an average of $461,000 in stock in 2013. Facebook moved to dismiss the case, but a Delaware judge ruled in October that even though CEO Mark Zuckerberg is the controlling shareholder, the company failed to allow all investors to vote on the compensation. The case is pending. Facebook declined to comment.
Other than bringing lawsuits, shareholders have little say over director pay. Unlike executive compensation, there’s no regular vote to gauge shareholder approval, and votes to amend the terms of board compensation plans typically occur only every five to 10 years.
“That leaves things back in the hands of directors,” said Sustainalytics’ Hewitt.
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