Overview

Over the past several years, companies and directors have worked to reform many corporate governance practices. As part of the effort to improve Board effectiveness, momentum towards independent leadership has grown, with many corporations now choosing to elect either a Non-Executive Chair or Lead Director. To analyze these trends, Equilar examined SEC filings in the two most recent fiscal years for public Fortune 500 companies. In the most recent year, this study includes 443 companies with fiscal years ending between June 30, 2005 and June 30, 2006.

Prevalence of Independent Leadership and Pay Premiums

From 2004 to 2005, the prevalence of independent Board leadership positions at Fortune 500 companies increased. In 2005, more than three-fourths of companies (76.1 percent) disclosed the presence of either a Non-Executive Chair or a Lead Director, as compared to 70.8 percent of companies in 2004. For 2005, among companies with an independent Board leadership position, 22.3 percent had a Non-Executive Chair, and 81.3 percent had at least one Lead Director. In addition, compensation premiums for the two positions have become more commonplace over the same time period, as detailed below.

• Non-Executive Chairs
  
  The portion of Fortune 500 companies disclosing a Non-Executive Chair increased from 14.6 percent in 2004 to 16.9 percent in 2005. Among these companies, 72.0 percent paid a premium to the Chairman in 2005 compared to 65.6 percent in 2004.

• Lead Directors
  
  Over half of Fortune 500 companies, 58.7 percent, designated a Lead Director in 2004; this rose slightly to 61.9 percent in 2005. While the number of companies with a Lead Director is much higher than those with a Non-Executive Chair, as a percentage of companies disclosing each position, the prevalence of pay premiums for Lead Directors is not as common as it is for Non-Executive Chairs. In 2004, of companies with a Lead Director, only 28.8 percent paid a premium for service in such position. In 2005, the number jumped to 38.0 percent.

Compensation Levels for Board Leadership Positions

Among Fortune 500 companies from 2004 to 2005, the median total compensation for a regular member of the Board increased from $135,000 to $150,000, rising 11.1 percent. Meanwhile, at companies with Board leadership positions, median total pay packages for Non-Executive Chairs and Lead Directors have also grown but at a slower pace, increasing by 7.9 percent and 10.4 percent, respectively. In 2005, Non-Executive Chairs at Fortune 500 companies received median total pay of $219,765, and Lead Directors received $162,424. For this analysis, total compensation is calculated as the sum of annual cash retainers, equity grants, and total Board meeting fees, but excludes all committee-related pay.

The following chart displays median total compensation levels for regular Board members, Lead Directors, and Non-Executive Chairs in 2004 and 2005.

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