Corporate Governance

The Director Compensation Project: Baxter International, Inc.

By Charlene Hunter

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 each have adopted their own standards for 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. Directors are not independent if they received over $100,000 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, 4200(a)(15), 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 Baxter’s (BAX-NYSE) 2008 proxy statement.

Director compensation – Fees earned in cash for directors averaged $81,000, with one director receiving over $100,000. Stock and option awards, which are considered director’s fees for purposes of exchange rules, were a uniform $121,564.

Director tenure – Most directors have been on this board since 2003, with one director’s tenure going back to 1997 and one to 2000. Two directors are also on three other boards; six directors are on one or more boards; two directors are executives with other corporations and do not serve on additional boards other than that of their employer. The board met nine times in 2007, with the usual additional committee meetings, having 84% overall attendance.

CEO compensation – Robert Parkinson’s 2007 compensation was $17.6 million, of which $1,296,153 was salary and another $3 million in cash per the company’s incentive plan. The stock and option bonus was $10,842,624, with much of the remaining compensation ($2,461,223) coming from the change in value of previous stock awarded but not issued. As with many corporations, Baxter compares its executive compensation plan to other health care firms, and has a policy of maintaining its salary payments within 50% of all firms, and incentive payments within 60%. Since the company’s $1.7 billion net income was up 22% over the previous year, and its share price rose 27% (against an industry average of 7%), executive bonuses were fully paid.

Full post as published by The Race to the Bottom on May 06, 2008 (boomark / email).