In addition to striking a balance between restricted stock and options, large technology companies are also looking to balance the amount of cash compensation versus stock options. Historically, technology companies have been heavily concentrated on providing stock compensation only. Cash compensation has been held to a minimum at all levels, especially for board members. This trend is changing, as cash compensation for executives and board members has increased over the past several years. Board members in particular are receiving higher cash retainers in large part because of the greater level of responsibilities they must undertake. From 2004 to 2006, the average cash retainer for board members jumped from $56,000 in 2004 to $62,300 in 2005 to $70,200 in 2006.This represents a cumulative increase of 25% since 2004.
In a post-Enron and WorldCom world, some may wonder how is it possible for board members to get away with raising compensation for both executives and themselves without any oversight. The answer is that recent corporate scandals and the new SEC proxy rule that went into effect last year has created greater transparency regarding executive and board compensation. Transparency ultimately leads to better behavior.There is clear evidence that compensation committees are much more active now than they ever were before, which is resulting in more thoughtful debates and analysis in the board rooms before compensation is awarded to either executives or board members. The enhanced independence of the compensation committee members is resulting in greater scrutiny and lengthier discussions before the compensation awards are granted.
Moving forward, large technology companies will likely move to a performance based compensation model, even in the area of stock compensation. Stock options under the old accounting rules mostly resulted in no charge to profit and loss (P&L) if the principal restriction was a time based vesting. In other words, executives earned their stock awards as they rendered their services over time. Since organizations are now obligated to take a charge, in some respects they are not subject to those same restrictions and can structure stock awards to allow vesting only if performance goals are met.
While we are already seeing greater use of performance measures for earning stock compensation, large technology companies will likely begin a fundamental shift over the next several years and start to increase the percentage of awards for executives that are based on performance versus pure time-based vesting.
