The Director Compensation Project: Hewlett-Packard

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company’s 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges have each adopted their own standards for director independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. The NYSE provides that directors will not be independent if they have a "material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company)."  NYSE Guide 303A.02.   In addition, they are not independent if they fall within a number of categorical rules, including the receipt of over $100,000 in direct compensation in any one year period over the last three years.  See Rule 303A.02(b)(ii).  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301. 

In calculating the $100,000, however, directors fees are excluded.  This exclusion has apparently been interpreted to mean that fees are not considered in determining independence, even under the "material relationship" provision.  As a result, directors can be paid exorbitant fees and still be considered independent.

One can see some of the effects of these rules when looking at the director compensation table from Hewlett-Packard’s (HPQ-NYSE) 2008 proxy statement.  According to the proxy statement, directors were paid the following amounts:

Name	Fees Earned or Paid in Cash(1) ($)	Stock Awards(2) ($)	Option Awards(2) ($)	All Other Compensation(3) ($)	Total ($)
Lawrence T. Babbio, Jr.	75,000	69,871	102,062	740	247,673
Sari M. Baldauf	49,333	78,502	93,149	580	221,564
Richard A. Hackborn	111,000	171,937	—	15,324	298,261
John H. Hammergren	13,000	3,015	197,810	—	213,825
Joel Z. Hyatt	—	63,481	—	292	63,773
John R. Joyce	22,917	47,620	—	219	70,756
Robert L. Ryan	83,000	171,937	—	17,139	272,076
Lucille S. Salhany	84,000	171,937	—	1,320	257,257
G. Kennedy Thompson	12,000	142,071	—	1,055	155,126

Director Compensation. HP's board met five times last year.  Although only one director received more than $100,000 in director’s fees paid in cash, the non-employee directors as a group averaged $200,034 in total compensation for their services. As can be seen in the table, much of the directors’ compensation came in the form of stock awards and options grants, which are considered director’s fees for purposes of complying with exchange rules.   

Director Tenure.  On average, the non-employee directors have served on the board for just under four and a half years.  Richard Hackborn, the lead independent director, has the longest tenure by far at sixteen years.  Many of the directors also sit on other boards.  One director, Robert Ryan, sits on the boards at UnitedHealth, General Mills, Black and Decker, and Citigroup.

CEO Compensation.  The compensation paid to the CEO, Mark Hurd, was $25,254,457 last year; a relatively small portion of which came in the form of cash ($2,823,500). $515,068 of Mr. Hurd's compensation was "other compensation."  This included a little over $50,000 for personal aircraft usage.  Roughly half of his compensation was tied to performance incentives, and while most of the remaining compensation was in the form of stock and options awards, the value of those compensation forms is dependent upon company performance.