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 2009’s Fortune 100 and using information found in their 2009 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

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 all compensation.  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 known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Costco’s (COST-NASDAQ(GS)) 2009 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 ($)
Jeffrey H. Brotman	430,000	3,032,914	1,339,753	122,980	4,925,647
Richard D. DiCerchio	627,098	1,820,351	722,597	95,439	3,265,485
Richard A. Galanti	612,063	678,510	606,685	121,031	2,018,469
Benjamin S. Carson, Sr., M.D.	35,000	209,353	0	0	244,353
Susan L. Decker	34,000	132,801	0	0	166,801
Daniel J. Evans	44,000	221,895	0	0	265,895
William H. Gates, Sr.	36,000	221,895	0	0	257,895
Hamilton E. James	38,000	222,939	0	0	260,939
Richard M. Libenson	34,000	222,939	0	0	256,939
John W. Meisenbach	33,000	222,939	0	0	255,939
Charles T. Munger	43,000	222,939	0	0	265,939
Jeffrey S. Raikes*	0	0	0	0	0
Jill S. Ruckelshaus	36,000	222,939	0	0	258,939

* Mr. Raikes joined the board in December 2008

Director Compensation.  COSTCO’s board met four times in 2008.  Except for Ms. Decker, all directors attended at least 75% of the board meetings.  Of the fourteen directors, all but five directors received between $33,000 and $44,000 in cash compensation.  Non-employee directors averaged $223,363 in total compensation for their services. In October 2007, each non-employee director received a grant of 3,000 Restricted Stock Units (“RSUs”). These vested one-third on October 17, 2008, and will vest one-third annually on October 17 for the following two years.  Moreover, directors are reimbursed for travel expenses incurred in connection with their duties as directors. 

Director Tenure.  Only four of the fourteen active directors have served on the board since 2000.  Mr. Sinegal, Mr. Brotman and Mr. Meisenbach have all served on the board since its inception in 1983.  Mr. Raikes, the newest member, joined the board in December 2008.  Several directors also sit on other boards.  Daniel Evans, a director since January 2003, also sits on the boards of NIC Inc., and Archimedes Technology Group.  Mr. Munger, a director since January 1997, also serves on the boards of Berkshire Hathaway Inc., Daily Journal Corporation, and Wesco Financial Corporation.

CEO Compensation.  James D. Sinegal, a co-founder who serves as CEO and President, received $4,906,696 in total compensation for 2008.  Of his total compensation, Mr. Sinegal received $350,000 as base cash salary.  Mr. Sinegal only received 40% of his possible cash bonus due to the failure of the company to meet its fiscal goals.  Nonetheless, Mr. Sinegal’s total compensation for 2008 increased by almost 65% over his total 2007 compensation.  This increase was due in large part to the 277% increase in stock awards from the previous year.  In addition, Mr. Sinegal received $67,130 in perquisites.  These other benefits include funds for matching 401K, health insurance premiums, life insurance, and a vehicle allowance.

Jeffrey H. Brotman, a co-founder who serves as Chairman of the Board, received $4,925,647 in total compensation for 2008.  Of his total compensation, Mr. Brotman received $350,000 as base cash salary.  Like Mr. Sinegal, Mr. Brotman received only 40% of his possible cash bonus, but increased his stock awards by 311% over his stock awards from 2007.  This allowed his total compensation for 2008 to increase 66% over his total compensation from 2007.  Mr. Brotman received $61,590 in perquisites.  Similar to Mr. Sinegal, these other benefits include funds for matching 401K, health insurance premiums, life insurance, and a vehicle allowance.

Comments

[life insurance girl]

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