Date: January 8, 1997 Source: Wall Street Journal, B2 Headline: "Small Firms Are More Likely to Pay Directors in Stock Than Large Firms" Summary Survey results reported today show that small publicly-traded companies are more likely than large companies to compensate members of their board of directors in stock rather than cash. The report, by Grant Thornton and Segal Co., also reports larger median annual option grants among the small companies: 1,000 options versus the median 450 options in the large company group. The study further points out that the median annual retainer fee for directors in the small companies is $5,000 versus $30,000 in the large companies. The article speculates that the lower director's fees "may reflect small companies' unwillingness to pay for good help." CPM Observations We caution the readers of this survey report on accepting the conclusions reported in today's news article. Our Firm's research indicates smaller companies certainly do use stock-based compensation to a greater extent than larger companies. The conclusions regarding relative option grant size, and the reasons for differing pay levels between small and large companies, however, may be based on a misunderstanding of the data and current marketplace practices. Regarding option grant size: Most companies base option awards on a formula converting option grant value or estimated option gain value into a number of options. This approach results in granting more options for a lower-priced (e.g., $15 per share) stock than for a higher priced (e.g. $75 per share) stock. We speculate that, if adjusted for the actual share price of the companies in this study, the data would reveal that option grants are not more than twice as large in the smaller companies. Regarding total compensation levels for directors: As with executive pay levels, within industry sectors there is a strong correlation between total compensation levels for board members and company revenue size. Far from reflecting an "unwillingness to pay" we believe that this shows a continued, though weakening, reliance on this historical relationship between size and compensation levels. Just as managing a larger company is believed to require a higher level of management skill, participation at the board level increases in difficulty with company size and complexity. Boards of directors are under increasing pressure to structure compensation programs for their companies executives, and for themselves, in a manner and amount that is consistent with competitive norms. Particularly with respect to director compensation, we caution against relying on individual data points and "median" data in structuring compensation programs. The increasing complexity of director compensation structures -- retainers, meeting fees, committee fees, stock deferrals, stock options, and more -- requires a total compensation analysis that goes beyond the question of "how many shares." Index: bdcomp.001 Recently in "Performance Bytes"... August 22, 1997 "Management Pay -- Unintended Consequences" The Economist, August 22, 1997 [strategy.002] March 7, 1997 "Performance Stock Options" Congressional Record, January 21, 1997 [alleeso.004] February 24, 1997 "Most EDS Employees To Get Stock Options..." Wall Street Journal, February 24, 1997 [alleeso.003] January 29, 1997 "American Air Pilots Asked to Agree to Arbitration" Wall Street Journal, January 29, 1997 [union.001] January 24, 1997 "A Tale of Two Compensation Strategies: (Eastman Kodak & AlliedSignal)" Fortune, January 13, 1997 [strategy.001] January 8, 1997 "Small Concerns Are More Likely to Pay Directors in Stock Than Large Firms" Wall Street Journal, January 8, 1997 [bdcomp.001] December 31, 1996 California Qualified Stock Options (CQSOs) State of California, Secretary of State (AB 3194) [alleeso.002] December 27, 1996 "All about EVA" CFO Magazine, November, 1996 [perfmeas.001] December 18, 1996 "Stock Options to Be Given to 69,000 Staff Members" (Chase Manhattan Corp.) Wall Street Journal, December 18, 1996 [alleeso.001]