Allegheny Energy Inc.’s eight non-employee directors potentially could earn tens of thousands of dollars more for performing their duties if the company’s request to issue 300,000 new shares of stock is approved by the Securities and Exchange Commission.
Under the new compensation package, the Greensburg-based energy company’s non-employee directors will be eligible for a retainer payment in common stock, at a rate of up to 1,000 shares per quarter, or 4,000 shares annually beginning in 2005. Each director will receive 800 common shares per quarter this year, the initial year of the proposed change.
The new plan would replace the annual stock retainer directors previously received, a flat sum of $12,000 worth of Allegheny Energy stock. The floating number of shares, to be determined quarterly by the board, was approved last month by stockholders at the company’s annual meeting.
Here is an example of how much more earning potential non-employee board members would have. Even using the 800-share figure and the stock’s six-month average price of $13.13, a director would have a stock cash-out value of $42,016 — a 250 percent increase from one year ago.
“The reason we are making the change in directors’ compensation is because we wanted to bring our package more in line with what other companies in our industry are doing,” said spokesman Janice Lantz. The company hired a consultant to help develop the new plan, she said.
Allegheny Energy does business in Southwestern Pennsylvania under the name Allegheny Power, serving about 650,000 electricity customers.
Its non-employee directors received other compensation increases for 2004.
For example, cash retainer fees they are paid were increased to $25,000 from $22,000 per director, while attendance at each board meeting now is worth $1,250, vs. $1,000 in 2003. Another $1,250 is paid each director for each committee meeting attended, vs. $1,000 per committee meeting attended last year. Those figures exclude audit committee members, who now receive $1,500 per committee meeting, vs. $1,200 in 2003.
The non-employee chairman of each board committee is rewarded an additional $8,000 annually, compared with an additional $4,000 one year ago. Again, the figures do not include the audit committee chairman, who this year is receiving an additional $12,500 and last year was given an added $8,000.
Allegheny Energy’s moves to increase directors’ compensation are not isolated. Experts say a number of companies nationwide have reviewed or are reviewing their packages because today’s directors are under considerably more scrutiny and must spend more time dealing with company issues.
“We did a study last winter that found directors’ compensation has increased 15 percent in just the last two years,” said Judy Canavan, senior consultant with the firm Sibson Consulting, Princeton, N.J.
“After all the scandals, a lot more light is being shed on what directors are doing,” said David Larcker, who teaches at the University of Pennsylvania’s Wharton School. “It’s also not that unusual as in Allegheny’s case, where there has been a large board member turnover, to go back and review compensation.”
Canavan said compensation in years past was not a primary reason men and women joined boards. Perhaps there was a tradeoff, for example a company might donate to a potential director’s cause in exchange for his or her board service. But today, such bartering is not allowed.
While directors’ compensation generally is some combination of cash and company equity, Larcker said the scale today is tilted more toward equity, which he believes brings up an interesting point.
“Do you want your board members to hold a tremendous amount of equity in the company?” Larcker asked. “I believe you want them to hold some, but not a tremendous amount because you don’t want them to be in a levered position — like management. The board’s job is supposed to be monitoring management.”