The Director Compensation Project: Valero Energy

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 know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Valero Energy Corporation (VLO-NYSE) 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 ($)
W.E. “Bill” Bradford	118,000	126,680	-	-	244,680
Ronald K. Calgaard	106,000	146,694	-	-	252,694
Jerry D. Choate	113,000	146,694	-	-	259,694
Irl F. Engelhardt	115,000	145,039	35,900	-	295,939
Ruben M. Escobedo	130,000	146,694	-	-	276,694
Bob Marbut	125,000	126,680	-	-	251,680
Donald L. Nickles	95,000	149,195	1,352	-	245,547
Robert A. Profusek	103,000	150,040	19,914	-	272,954
Susan Kaufman Purcell	104,000	146,694	-	14,925	265,619
Stephen M. Waters**	34,000	10,003	24,875	-	68,878

* Management-director; Valero’s CEO, President, and Chairman of the Board does not receive separate compensation for his board service.

**Mr. Waters was elected as a director at the meeting of the Board held on September, 23, 2008.

Director Compensation. Valero Energy Corporation’s board of directors held six meetings in 2008. In sum, the board’s committees held twenty meetings. No member of the Board attended less than 75% of the meetings of the Board and committees of which he or she was a member. Discounting Mr. Waters, who joined the Board in September, 2008, non-management directors earned between $95,000 and $130,000 in direct cash compensation and averaged $262,833 in total compensation. Mr. Englehardt was the highest compensated director, earning a total of $295,939.

Director Tenure. On average directors have served on VLO’s Board just over 7 years. Ms. Purcell and Mr. Escobedo are the most tenured directors having served on the Board since 1994. Mr. Waters is the newest member, having joined the Board in 2008. Mr. Nickles joined the Board in 2005, after serving as U.S. Senator for the State of Oklahoma for 24 years. Several directors also sit on other boards. Mr. Waters sits on the board of Boston Private Financial Holdings, is Chairman of the Advisory Board of the Boston University School of Public Health, Acting Chairman of the United States Naval Institute, and Co-Chairman of the Harvard College Fund.

CEO Compensation. Mr. Klesse, who serves as CEO, President, and Chairman of the Board for Valero Energy Corporation, received $10,471,795 in total compensation for 2008. Of his total compensation, Mr. Klesse received a $1,500,000 base cash salary. Mr. Klesse’s bonus for 2008 was $705,510, over $3,000,000 less than his bonus for 2007. At the request of Mr. Klesse, the VLO Board significantly reduced his 2008 bonus in order to pay an extra $50 bonus to each hourly and nonexempt employee participating in Valero’s all-employee bonus pool. In 2008, VLO reimbursed Mr. Klesse over $5,000 for his club membership dues; however, effective January 1, 2009, such reimbursements were discontinued upon his request. Mr. Marcogliese is VLO’s Executive Vice President and Chief Operating Officer. In 2008, he was VLO’s second highest compensated executive, receiving $5,990,158 in total compensation.