The document summarizes some unusual benefits received by directors at certain companies, including personal use of company aircraft, retirement plans, change in control agreements, and consulting agreements. It notes that while such benefits are not necessarily indicators of poor oversight, they could compromise directors' independence and willingness to challenge management. Specific examples are provided of companies where directors receive these kinds of additional compensation. The document concludes that payments above traditional fees may not enhance shareholder value and could impair independent oversight of management.

1. Analyst Alert
from The Corporate Library
Analyst Alert
2010 Proxy Season Foresights #2: Director Benefits and Red Flags—Things to Watch Out For
$15.00
Introduction
For years, CEO perquisites have received significant press and investor attention. There is less awareness, however,
that directors sometimes also receive similar perks. The basic elements of director and named executive officer
compensation are the same. A board member typically receives a mix of cash fees and stock for service just as a
senior officer receives a base salary and equity awards for running the corporation. However, this is by and large the
extent of director pay, while executive compensation often goes on to include any combination of bonuses,
perquisites, and retirement plans. These additional elements of executive compensation are ultimately agreed to by
the board of directors, though rarely does the board itself receive these forms of compensation.
The Corporate Library’s analysts examine the related party transactions and director compensation plans for all the
companies in our coverage universe as part of our routine data collection and director independence assessment. At
a significant subset of our companies, we have identified aspects of director compensation that go beyond traditional
“non-employee” director pay. The current report describes some of these atypical uses of shareholder capital: use of
company aircraft by directors independent of business travel, retirement or change of control plans for members of
the board, and director consulting agreements. Investors in companies that confer such benefits on directors should
be aware that they are unusual, and should consider carefully their likely impact on the independent oversight
capacity of the board.
Director Aircraft Use
Most publicly traded companies will fly directors to and from board and committee meetings and pay any associated
costs. But what happens when company aircraft is made available to directors for their own personal use? Though a
perquisite such as aircraft use does not necessarily correlate with poor director performance, the inclusion of such a
benefit could make directors less inclined to challenge management and risk losing the comforts of their director
position. Indeed, at a number of companies where this perk exists, there are other related party transactions or board
characteristics that raise concerns about directors’ supervision of executives. While this evidence is anecdotal, we
think it is worth investors’ careful consideration:
• Chesapeake Energy Corporation allows directors personal use of aircraft which the company fractionally
owns. The eight passenger aircraft are available to all independent directors for up to 40 hours of flight
time per year in North America, the Caribbean and Mexico, according to proxy statements. This 40-hour
aircraft allotment is slightly less than what is given to two executive vice presidents of Chesapeake
Energy, and significantly less than what is allocated to higher-ranking senior staff. As we’ve written
elsewhere, there are serious concerns about the Chesapeake board’s oversight of executive
compensation. A small example from the related-party transactions section of the proxy describes how in
December 2008 and with the financial crisis in full swing Chesapeake Energy bought a collection of
historical maps from CEO and co-founder Aubrey K. McClendon for $12.1 million, which up until then had
been made available to the company on a cost-free loan basis. This purchase was authorized by the
board of directors after being approved and reviewed by the audit committee.
• At Plains Exploration & Production Company (PXP), non-employee directors are allowed a maximum of
30 flight hours per calendar year. This is more than some executive vice presidents of PXP, who are
generally permitted between 15 and 30 hours of personal flight time according to proxy statements. While
this board, unlike Chesapeake’s, did not purchase anything from its CEO in 2008, they do continue to use
discretionary clout to inflate the CEO’s contractually obligated compensation. For instance, despite a
2005 long-term retention agreement in which PXP agreed to award CEO James C. Flores roughly 2
million restricted stock units over the course of 10 years (through 2015), the board continues to grant him
annual discretionary awards on top of those: 150,000 stock units in both 2008 and 2007, and 130,000 in
2006.
© 2010 The Corporate Library, LLC 1

2. Analyst Alert
from The Corporate Library
• Financial services company AmeriCredit Corp. discloses in its proxy that directors are entitled to “certain
hours” of use of company aircraft for personal reasons. Four out of five independent board members
elected to make non-business use of the aircraft in 2008. In the case of AmeriCredit Corp., it is the
composition of the board itself that is perhaps even more interesting than any discretionary executive
payments; the ten-person board is composed of two inside directors, three designated directors, and five
outside directors. The five outside directors of the board have an average tenure of 15 years each.
Extensive service tends to make directors act less independently from management and perquisites are
likely to only exacerbate this issue.
Director Retirement Plans
Similar to aircraft use, enrollment in a company retirement program could bring into question the independence and
loyalties of a director. After all, it is a rare line of work that affords one the opportunity to earn a lucrative pension
without ever serving as a company employee. From a corporate governance perspective, management incentivizing
directors with retirement benefits makes them seem more like company employees than independent representatives
of shareholders. Director retirement programs at companies such as American Express Company, NiSource, Inc.,
Burlington Northern Santa Fe Corporation, Halliburton Company, PPG Industries, Lockheed Martin and Fortune
Brands, Inc. have been frozen to new participants in recent years, but existing directors who were previously enrolled
are still entitled to benefits.
For instance, at Halliburton Company the director retirement plan was closed to new directors as of May 2000.
However retiring directors Robert L. Crandall and William R. Howell received lump sum payments of $678,812 and
$567,869, respectively, upon their retirement from the board in May 2008. This is an indicator of just how long it can
take for these plans to play themselves out even after they have been eliminated or frozen. Though these programs
appear to be on the decline, there are still a number of publicly traded companies offering this benefit to independent
board members. This is especially true at regional banks and other companies in the financial services industry. For
example:
• At Sierra Bancorp a director retirement plan was instituted in October 2002. Under this plan each non-
employee director is entered into a retirement agreement which provides for a benefit of $25,000 per year
for ten years, commencing at retirement, with eligibility commencing after five years of board service or
attainment of age 70.
• United Financial Bancorp, Inc. also maintains a director retirement plan with enrollment open to current
and future directors. The benefit is equal to “70% of the average annual director’s fees over the highest
three years of a director's final 10 years of service”, according to proxy statements, and is payable
annually over a 10-year period upon commencement of retirement.
• At Alliance Financial Corporation, the retirement benefit is equal to 35 percent of a director’s annual fees
increased by 1 percent for each full year of service up to 25 years, reaching a potential 60 percent
maximum, plus an additional 10 percent if the director serves as a committee chair for at least three
years. So, in this particular case, serving on Alliance Financials board for more than two decades and
being in charge of a committee would net a director the largest retirement benefit. Is incentivizing
directors simply for long tenure and committee control more in the interests of management or the
shareholders?
• Board longevity also plays heavily into director retirement plans at Cape Bancorp, Inc. and Northeast
Community Bancorp, Inc. At Cape Bancorp, the retirement benefit for directors is equal to 2.5 percent
times the director’s years of service up to a maximum of 50 percent of the average of the highest fees
earned by a director during any five consecutive calendar years. Northeast Community Bancorp provides
no retirement benefits to directors with less than 10 years of service, 50 percent of the benefit for 10 to 15
years of service, and 75 percent of the benefit for 15 to 20 years, while 20 or more years of service will
get a director 100 percent of the director fees earned during the 12 months prior to termination, continued
for a period of 10 years after their retirement. Indeed, it would be in the best interest of a director at either
of these companies to be continually nominated by management in order to earn this retirement income,
but would it be in the best interest of shareholders when contentious issues arise.
© 2010 The Corporate Library, LLC 2

3. Analyst Alert
from The Corporate Library
Director Change in Control Agreements
Even more concerning is the conflict of interest presented in the retirement-related change of control plans some
companies have in place for independent directors. A benefit of this kind is typically designed to ensure a retirement
payment should company ownership change hands – an arrangement typically received only by senior-level
executive officers. However, in the case of directors, it is ultimately their decision whether or not a merger or
acquisition comes to fruition, which brings into question whether it is appropriate that they earn any incentive from the
outcome, let alone one that is commonly reserved for senior employees.
• At Clifton Savings Bancorp, Inc. a director is eligible for the company change in control retirement plan
after just one year of service, regardless of age. Payable for the life of the participant, the minimum
annual payment under the plan would have been $391,700 per year for each director according the 2009
proxy statement. The proxy states that “this expense would represent approximately 7.6% of Clifton
Savings' reported net income of $5.14 million for the year ended March 31, 2009.”
• At XTO Energy Inc. directors would receive three times the annual cash retainer plus three times the
value of the annual stock grant upon a change in control. If a change in control had occurred at XTO
Energy on December 31, 2008, each director would have received payment of more than a million dollars
as a result of the transaction.
Director Consulting Agreements
While personal use of company aircraft and retirement plans may blur the line between employee and non-employee,
they are benefits enjoyed by the board as a whole and do not specifically compromise the independence of a
particular director. Consulting agreements, on the other hand, serve as a direct exchange of money for service
between company and director and require a related party transaction disclosure of the relationship. These
agreements generally pay well, yet very rarely specify precise time commitments or duties to be performed.
Additionally, these “non-employee” directors are already compensated well for the requisite knowledge they bring to
the board. If independent compensation consultants are now barred from doing additional work for a company
because it could cloud their judgment, non-employee directors might be excluded from providing consulting services
to a company that already pays them to serve independently.
• At Stryker Corporation, director and university professor Donald M. Engelman was compensated at a rate
of $4,500 per day in consulting fees in 2008, though the proxy does not expand on what the consulting
entails. His consulting fees totaled $128,609 in 2008 after averaging $134,658 over the prior three years.
Mr. Engelman received the same $4,500 rate in 2007, which was an increase over the $4,250 per day
received in 2006 and $4,000 in 2005. The 21-year board veteran has received these consulting fees
since at least 1994, which is the first year of electronic proxy filings available with the SEC for Stryker
Corporation.
• CME Group Inc. is a financial securities company with three consulting contracts issued to current
directors. Upon CME Group’s acquisition of NYMEX Holdings in August 2008, NYMEX President James
E. Newsome joined CME Group’s board and was given a $1 million consulting contract to help integrate
the NYMEX with CME Group. Other director/consultants are directors Leo Melamed and John F.
Sandner. They have each been affiliated with CME Group for more than 30 years and have received
annual fees of $300,000 and $200,000, respectively, since 2005 to provide consulting services related to
the financial industry and their areas of expertise.
© 2010 The Corporate Library, LLC 3

4. Analyst Alert
from The Corporate Library
• Several consulting agreements are currently in place at Freeport-McMoRan Copper & Gold Inc., which
are renewable annually. B.M. Rankin Jr., a non-employee director who serves as the board’s vice
chairman, has a consulting agreement with Freeport-McMoRan that paid him $891,001 in 2008 for
services related to finance, accounting, and business development. This figure includes $425,144 related
to personal use of company aircraft along with other expenses incurred for personal use of company
facilities and tax gross-ups. Other board members with consulting agreements include J. Bennett
Johnston whose daughter is married to an employee of Freeport-McMoRan and who received annual
consulting fees of $300,000 for services related to international relations and commercial matters;
Gabrielle K. McDonald who received $300,000 annually in consulting fees in connection with her non-
employee role as special counsel on human rights to the company; J. Stapleton Roy who provides advice
and consultation on world political, economic, strategic and social developments in exchange for an
annual fee of $200,000; and director J. Taylor Wharton who received $400,000 annually for providing
consulting services related to all medical and health issues affecting directors, officers, and employees.
Conclusion
One of the most important roles of an independent director is to act as a check against the self-interest of
management. Payments made above and beyond traditional cash fees and stock awards may compromise the
independence of a director and bring into question her or his ability to provide proper independent oversight of
management. Indeed, these methods of compensation are too similar to those received by high-ranking officers to
adequately pass as non-employee benefits. In short, the payments and perquisites discussed in this report have clear
benefit for the directors and perhaps management, but likely do not provide enhanced value for shareholders.
Greg Ruel, Research Associate
February 10, 2010
© 2010 The Corporate Library, LLC 4

5. Analyst Alert
from The Corporate Library
For more information about The Corporate Library and our products and services, please contact us:
877 479-7500 toll free U.S.
207 874-6921 outside U.S.
sales@thecorporatelibrary.com
www.thecorporatelibrary.com
You may also be interested in these reports available from The Corporate Library:
The Corporate Library’s 2009 Governance Practices Series ($75)
This three-part series, now available as a discounted bundle, examines 2009 trends in governance
practices in the S&P 500, Russell 1000 and Russell 3000. The first report examines the adoption of
clawback policies; the second describes trends in board leadership from 2004 to 2009; and the third
report examines trends in auditor turnover, auditor ratification and non-audit fees paid to auditors.
By: The Corporate Library Research Team
Published: January 11, 2010
Pay For Success III ($45)
Companies identified as having a successful pay-for-performance link in 2008 that did not meet target
performance either drastically reduced bonuses or eliminated them altogether, according to this report.
“Pay For Success III” identifies and examines the pay policies of 12 companies where long-term value
creation and moderate compensation of the CEOs responsible are clearly linked.
By: Paul Hodgson, Senior Research Associate
Published: December 2, 2009
© 2010 The Corporate Library, LLC. All rights reserved. No part of this publication may
be reproduced, republished, altered, posted, transmitted, or distributed without written
permission from The Corporate Library, or, in the case of photocopying, under the terms
of a license issued by The Corporate Library. Additional copies of this publication may
be purchased from The Corporate Library’s online store at
www.thecorporatelibrary.com.
© 2010 The Corporate Library, LLC 5