The Director Compensation Project: Costco

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Costco’s (NASDAQ: COST) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Benjamin S. Carson, Sr., M.D.	35,000	169,879	0	0	204,879
Susan L. Decker	36,000	169,879	0	0	205,879
Daniel J. Evans	44,00	169,879	0	637	214,516
William H. Gates	36,000	169,879	0	0	205,879
Hamilton E. James	35,000	169,879	0	0	204,879
Richard M. Libenson*	34,000	169,879	0	330,189	534,068
John W. Meisenbach	34,000	169,879	0	0	203,879
Charles T. Munger	43,000	169,879	0	0	212,879
Jeffrey S. Raikes	34,000	169,879	0	956	204,835
Jill S. Ruckelshaus	36,000	169,879	0	0	205,879

*Consultant to the company.

Director Compensation. During the 2010 fiscal year, Costco held four Board of Directors meetings.  With the exception of Hamilton E. James, each director attended at least 75% of both the Board meetings and his or her committee meetings.  There were thirteen directors in attendance at the shareholders meeting in 2010.  Costco pays each non-employee director $30,000 per year and $1,000 for each Board and committee meeting attended.  Costco reimburses directors for their travel expenses relating to their duties.  In addition, each director receives a grant of 3,000 restricted stock units annually.

Director Tenure.  John W. Meisenbach holds the longest tenure of any Costco director, as he has been a director since the beginning of the company.  The directors with the shortest tenures are Jeffrey S. Raikes, who has been a director since December 2008, and Susan L. Decker, who has been a director since October 2004.  Several directors sit on other boards, including Ms. Decker who is also a director of Berkshire Hathaway Inc., Intel Corporation, and LegalZoom.com.  In addition, Daniel J. Evans serves on the boards of NIC Inc. and Archimedes Technology Group.

CEO Compensation.  James D. Sinegal, Costco’s Chief Executive Officer, earned $3,529,434 during the 2010 fiscal year.  Jeffrey H. Brotman, Costco’s Chairman of the Board, earned $3,525,378 during the 2010 fiscal year.  Mr. Brotman is a co-founder of Costco and has been a director since Costco’s inception.  Mr. Sinegal and Mr. Brotman each were awarded cash bonuses of $190,400 in the 2010 fiscal year.  In 2010, the Board granted 50,000 performance-based restricted stock units each to Mr. Sinegal and Mr. Brotman, which is the same number granted for the prior fiscal year.