Page 639 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

624 The Complete Guide to Executive Compensation

the earliest of the following: death or disability, retirement from the board within one year
of attaining age 70 (or later age if retired later), failure to be reelected, or resignation to enter
government service.
The number of shares under restriction is adjusted for stock splits. Typically, the shares are
considered “stock units,” which will be converted one for one to shares of company stock at the
time the restrictions lapse. Although the value of the units will be determined by the share price
at time of conversion, the charge to the earnings statement is based on value at time of
award. The tax deduction to the company will come at the time the restrictions lapse and the
individual has ordinary income. On the assumption that the stock price will rise, the company
will have a larger tax deduction than a charge to the earnings statement. For purposes of stock
ownership, the number of “units” may be reported for each director in the proxy. To satisfy tax
treatment, the requirements for deferral (as reviewed in Chapter 3) must be followed.
Some choose to pay the equivalents of retainers all in company stock. This may be a
problem for those intending to supplement their income with board fees. Others may pay
part in cash and part in stock, probably with the view that the cash will meet tax requirements
without having to sell any stock. Alternatively, it may be required to be deposited in an
unfunded, deferred account until leaving board service. Rather than use actual stock, many
companies use stock units when deferrals are involved. No stock is issued—only a promise
that the company will pay a number of shares of stock equal to the number of units at the end
of the deferral period. Typically, the units would also be credited with dividend equivalents
during the period of deferral.
It has been argued that directors will increase their identification with the shareholder if
given stock awards and/or stock options. These could either be real or phantom plans.
Essentially, any plan described earlier for executives could be developed for non-employee
directors. However, a key planning consideration is the limited period many will serve as
directors. Thus, a 10-year, nonqualified stock may not be as attractive as stock awards.
However, a stock purchase plan, in which the corporation matches director purchases in
whole or in part, may be very attractive. An additional advantage of stock-based compensa-
tion is that it avoids the embarrassment of listing in the proxy directors with only a token
number of shares of stock (e.g., 100).
Some companies have also adopted stock ownership guidelines much like those described
earlier for executives. The requirement may either be a stated number of shares or the value
of shares as a stated multiple of the annual retainer. It is important to ensure that it is
not so high as to create financial hardship. As with the executive officers, the board needs
to determine the extent to which the guidelines are completely voluntary or the extent to
which they are enforced (e.g., by paying all of the director’s annual pay in equity deferred
to retirement until the “guideline” target is met).
Motivating Behavior

Director behavior should not only be in accord with long-term shareholder interests (which
suggests acquiring and holding a significant number of shares of company stock), but also
should be consistent with the code of responsibility, the code of ethics, and the code of
conduct adopted by the board. Directors are expected to do the right things the right way.
They should act in accordance with the principles of good corporate governance. They (and
their companies) should be barred from providing professional or financial services to the
company, thereby avoiding a possible conflict of interest.