A Look At Auto Retailer Board Member Compensation

Many board members award themselves (yes, that's how it's done) gold-plated pay packages even though they regularly play hooky in ways that would get the average worker canned in a heartbeat. More than 520 directors from Equilars database of about 4,000 companies missed 25% or more of their board meetings in the last two years. Most of those meetings last just two days.

Source: Michael Brush, MSN Money, December 16, 2005 "Pay soars in the board room"

One of the things I said with this quarter's rankings was that I need to do a better job understanding the board of directors of each of the companies in the auto retail stocks index.    

So I have compiled some data about the respective boards. 

My general conclusions are as follows:

• More absolute dollars spent on board members, fewer dollars spent per hour.  Contrary to most articles you read.  I don't think the board of directors receive enough compensation.  Having said that, I also think they need to put in more hours.  The board of directors has THE GREATEST IMPACT on a shareholders worth.  They select management.  And they ultimately determine (approve) the course of direction for the company.  5 weeks of work (a year) is just insufficient (in my book).  As a result, I think board members should be limited to how many other activities they can be involved in (i.e. other board seats and managerial positions).  Board members are just too important to be some people that show up for a few meetings every year to listen to management's update.   
• Board compensation plans need to be simplified.  The idea of paying a board member "per meeting" is ridiculous in my opinion.  If that is all they are doing, there is something wrong.  So I like the very simple approach LKQ uses (that you can see in the tables below).   Except instead of a large cash retainer (as LKQ does), I wish the funds were given in restricted stock to help tie the board to the shareholders. I also liked CarMax giving its board members the employee discounts on its cars.  But I did not like Group 1 and AutoNation giving its board members cars.  I also did not like Penske Automotive matching charitable contributions up to $25,000.  Company's should have their own corporate giving programs to be a part of their communities, not augment someone else's charitable giving.     
• Larger boards.  I do not like the argument some companies give in their proxies about wanting a smaller board as a means of more effective governance.  When you start slicing it too thin (and throw in some management team members) you start to get only a few people making some really important decisions.  I understand you cannot manage by committee.  But the job of the board is not management.  It is about overseeing management and helping to bring in talent.  It is about determining pay plans.  Making sure the books are being handled right.  And even establishing/approving the vision for the company (for management to execute).  And I find it difficult to see how all of this can be done with so few people (when you exclude out the management members) at some of the companies in the auto retail stocks index. So AutoZone, AutoNation, and Lithia need to get bigger board of directors.

Some background about board of directors (nationwide)

Michael Brush of MSN Money did a pretty interesting article a couple years ago about board of directors.  As you saw from the opening quote, 520 directors from 4,000 companies missed 25% of their board meetings or more. 

Although I am happy to tell you that after reviewing all of the proxies of the auto retail stocks index companies, very few board members attended less than 75% of the meetings. 

Here are some other interesting stats Michael Brush uncovered (about board's nationwide. . ).

The directors themselves think they're doing plenty of work for their pay: A National Association of Corporate Directors [NACD] poll of its membership found that 84% of directors say they are devoting the appropriate amount of time and attention to their duties, compared to 62% in 2001.

How much more work are directors doing? The NACD survey found that directors estimate they will spend 191 hours doing their work in 2005, compared to 156 hours in 2003. All those extra hours explain why directors compensation is going up as much as it is, says Peter Opperman, a director compensation expert at Mercer Human Resource Consulting.

But even at 191 hours (or almost five 40-hour weeks), the average board pay of $139,000 works out to $727 an hour. Nice work if you can get it.

Source:  Michael Brush, MSN Money, December 16, 2005 "Pay soars in the board room"

Auto Retail Stocks index board of directors size

 

Company	Board members	Employees per board member	# of non-employee board members	Non-employee directors as % of board*
Lithia	5	1,252	3	60%
Group 1	7	1,255	6	86%
Asbury	10	830	8	80%
Sonic	10	1,120	8	80%
Pep Boys	12	1,566	11	92%
Penske Automotive	12	1,250	9	75%
Genuine Parts	13	2,462	11	85%
Keystone	7	540	6	86%
O'Reilly	9	1,906	9	100%
Midas	6	92	5	83%
LKQ Corp	7	586	6	86%
Monro	8	486	7	88%
America's Car-Mart	6	133	4	67%
CarMax	12	1,145	10	83%
AutoNation	8	3.250	6	75%
AutoZone	9	5,889	8	89%
Advance Auto Parts	9	2,832	8	89%
CSK Auto	7	1,360	6	86%
Hertz	12	2,625	11	92%
Copart	7	305	4	57%

Source: company reports, efficient insights llc

*Non-employee director.  This is a little different than the formal definition of independent directors.  Independent directors do not include former execs and major shareholders.  Under my definition, as long as the person was not an active employee of the company, they were counted as a non-employee director. 

 

Auto Retail Stocks index board compensation

Below are the board compensation plans for non-executives. . .

Company	Annual retainer	Non-exec chair/lead independent director	Stock options/grants	Other
Lithia	$36,000	N/A	2,000 shares (option), 1,200 stock grants	N/A
Group 1	$35,000	$100,000	$70,000 in  restricted stock	Use of company vehicle or $17,600 annually
Asbury	$35,000	$225,000	$70,000 in restricted stock	N/A
Sonic	$35,000	$12,500	$60,000 in restricted stock	N/A
Pep Boys	$35,000	$80,000	$45,000 in restricted stock and options	N/A
Penske Automotive	$40,000	N/A	2,000 shares of restricted stock	1 educational session.  And $25k match for charity
Genuine Parts	$35,000	N/A	1,500 restricted stock units
Keystone	$36,000	$100,000?	$46,000 in restricted stock
O'Reilly	$30,000	N/A	Option to buy 5,000 shares
Midas	$45,000	$70,000	1,000 shares of restricted stock
LKQ Corp	$110,000	N/A	Initial option to buy 60,000 shares.
Monro	$16,000	N/A	Initial option to buy 4,559 shares at $30.93
America's Car-Mart	$36,000	N/A	Option to buy 3,750 shares each year
CarMax	$50,000	$50,000	$30,000 stock, $50,000 options	Employee vehicle discount plan
AutoNation	$25,000	N/A	Initial 50,000  share options and 20,000 share options annually	$22,500 vehicle allowance
AutoZone	$40,000	N/A	Initial 3,000 share options, 1,500 options annually.  And extra 1,500 option annually if board member owns 5x more shares than annual fee
Advance Auto Parts	$25,000	$25,000	Initial and annual grant of 7,500 options and 825 restricted stock.
CSK Auto*	$50,000	N/A	10,000 share option annually
Hertz	$60,000	N/A	$90,000 in stock options
Copart	$32,000	N/A	In October 2005 gave members option to buy 20,000 shares at $24.03 exercise price
NYSE  largest 100 companies (median)	$65,000	$312,500	64% of compensation stock options and stock grants
Nasdaq largest 100 companies (median)	$37,500	$128,487	74% of compensation stock options and stock grants

Source: company reports, efficient insights llc, NYSE and Nasdaq top 100 Frederick W. Cook & Co., Inc.

*CSK as of last proxy filed 2005.  But the company plans to file a new proxy around time of shareholder's meeting November 8, 2007.

 

Auto Retail Stocks index attendance pay and committee chair person extra pay

Company	Board meeting	Committee meeting	Audit Chair	Other chairs
Lithia	$5,000	$5,000	100 extra shares	N/A
Group 1	$2,500	$2,500 audit, $1,500 all other	$15,000	$10,000 compensation chair, $7,500 other committees
Asbury	$1,500	$1,500 ($2,000 for audit) ($1,000 telephone)	$20,000	$5,000
Sonic	$2,000 ($1,000 telephone)	$2,000 audit, $1,500 other ($1,000 phone)	$12,500	$10,000 compensation chair, $7,500 other
Pep Boys	None (good job)	Members of audit get an extra $15,000, other committee members get an extra $5,000	$25,000	$10,000
Penske Automotive	None (bravo)	Audit committee members get an extra$5,000 a year	None	None
Genuine Parts	$1,250	$1,250	$40,000	$40,000
Keystone	$2,000	$1,250	$10,000	Compensation chair $7,500, Corporate governance $6,500
O'Reilly	$2,500	N/A	$5,000	$2,500
Midas	None (nice)	N/A	$5,000	$5,000
LKQ Corp	None (good)	Committee members get an extra $6,000 a year.  Exec board members an extra $25,000 a year	N/A	N/A
Monro	$3,000	$1,000	$15,000	$5,000
America's Car-Mart	None (nice)	N/A	$24,000	N/A
CarMax	$1,500	$1,500	$15,000	$10,000
AutoNation	$1,000 for meetings beyond 4	$1,000	$10,000	N/A
AutoZone	None (good)	N/A	$10,000	$5,000
Advance Auto Parts	$2,000 ($1,000 by phone)	$1,000 ($750 by phone)	$15,000	$10,000
CSK Auto*	$1,500	$1,500	$15,000	$7,500
Hertz	None (nice)	Members of audit and compensation get an extra $10,000	$25,000	$15,000
Copart	None (great)	N/A	N/A	N/A
NYSE  largest 100 companies (median)	$2,000	$1,500	$7,500	Compensation$9,000, Nominating and governance $8,500
Nasdaq largest 100 companies (median)	$2,000	$1,500	$10,000	$5,000

Source: company reports, efficient insights llc, NYSE and Nasdaq top 100 Frederick W. Cook & Co., Inc.

*CSK as of last proxy filed 2005.  But the company plans to file a new proxy around time of shareholder's meeting November 8, 2007.

Here is the link to the Frederick Cook & Co. survey on the top NYSE and Nasdaq company compensation plans for board members. They are consultants (and I don't even know them so I am not trying to advertise).  But if you go to their main website (or the link to all of their surveys that I include below) they have a bunch of interesting articles and survey's available on the topic (as well as executive compensation). 

http://www.fwcook.com/alert_letters/Director_Comp_06.pdf

http://www.fwcook.com/surveys.html