When Richard D. Fairbank travels on business, the CEO of Capital One Financial Corp. doesn’t call for the corporate jet. He flies like most people — on a commercial airline. Even more spartan, when it comes to a salary and bonus, the chairman of America’s sixth largest credit card company doesn’t draw a dime. Yet, he drew the No. 3 spot on Virginia Business’ annual list of the top 100 paid executives in the state. Fairbank took home $27.2 million last year after exercising 640,000 stock options — the sole source of his compensation.

That might seem like chump change compared to a year ago when high-tech execs were cashing in about twice as much. Yet, as the dot.commers flame out, more traditional sectors such as financial and energy services are coming out as leaders. In the No. 5 slot is fellow Capital One executive, President and Chief Operating Officer Nigel W. Morris who came in number No. 5 after cashing in $18.8 million worth of stock options. Despite all the dough, Morris has been known to fly economy class. "That’s one of the things that has made us successful. We don’t focus on extravagances," says Hamilton Holloway, corporate media manager for the Falls Church-based company.

With a slumping economy, tanking stock market and rising unemployment rate, more companies may end up taking a chapter out of Cap One’s book. It’s doubtful, though, that many of them would rely exclusively on the exercise of stock options as a means of paying top talent. As the list shows, stock options remain a large part of executive compensation with many of the greatest earnings coming from stock gains gleaned from such options. Even so, it is risky business. In a bear market, there’s always the risk of options going underwater, if the price to purchase them exceeds the value of the stock.

Fortunately, for Fairbank and Morris, Capital One’s stock price has appreciated at a compound annual rate of 52 percent since 1994. The future looks bright for the credit card company that helps keep Americans in plastic. Driven by a 39 percent increase in total revenues over last year, the company’s second quarter earnings represented the 16th consecutive quarter of record earnings, and Capital One expects to meet this year’s target of 30 percent growth in earnings per share.

By not splurging on corporate perks such as jets and sports cars for its executives, Capital One has money for creating a workplace atmosphere that motivates its 20,000 employees and makes them look forward to coming to work. "Fun is a key part of Cap One’s culture. We have a fun budget for everyone in the company," says Holloway. The company kicks in $80 for each worker per quarter, or about $1.6 million, with the money going into managers’ budgets. They’re responsible for planning a quarterly fun activity for their team and, the events take place on company time. "My team went sailing recently. Other teams have swam with the Dolphins in Orlando, Fla., gone white water rafting, or spent a day at King’s Dominion," explains Holloway. The outings translate into an annual fun ethic of $6.4 million, more than the total salaries of most executives on our list.

If money buys fun then perhaps the person who can afford the most roller coaster rides is Timothy M. Donahue, president and CEO of telecom giant Nextel Communications Inc. He’s the No. 1 paid executive among public companies in Virginia for fiscal 2000. Like many executives approached by Virginia Business, Donahue declined to talk about his $31.7 million dollars in earnings — no surprise since Nextel and many other companies are laying off workers in response to the economy’s downturn. Nextel announced in May that it would cut its work force of about 17,000 by 5% or 850 workers.

Compared with other telecom executives, Donahue is a survivor. Out of last year’s line up, he’s the only executive from a telecom company who stayed in the top 10 following the meltdown of many telecom and dot-com companies in the wake of Nasdaq’s spectacular crash. Compensation figures included in proxy statements of publicly traded companies show that during fiscal year 2000, Donahue’s Reston-based company paid him $465,174 in salary, $470,250 in bonus, and $11,916 in other payments. The biggest chunk of his compensation came from $30.8 million in stock gains. That’s $4 million less than the $35 million Donahue pocketed during fiscal year 1999 when he ranked No. 4, but enough to put him well over the top—he beat the No. 2 executive, Richard L. Sharp, retired chairman of Circuit City — by more than a million.

Overall, this year’s list mirrors the bruising from a badly beat up stock market, particularly in the technology sector. In recent months, the market has rallied long enough to throw a few hopeful punches only to fall down again, taking with it hopes for fatter stock gains for executives. For the first time since 1996, the average total compensation for executives in the Virginia 100 dropped — from $7.8 million in 1999 to $5.3 million in 2000, probably as a result of stock market tumbles which trimmed stock gains. Gone from this year’s list, because he moved his corporate offices out of state, is the man who sat at the top for several years: AOL’s Stephen M. Case. He’s gone to New York following AOL’s takeover of Time Warner.

Besides Donahue, two other Nextel executives scored high rankings. Vice Chairman Morgan E. O’Brien, with total earnings of $18 million moved into the No. 6 position. He’s followed by Steven M. Shindler, CEO of Nextel’s international division who raked in $17.1 million. While some telecoms have fallen by the wayside, Nextel’s nationwide digital wireless network continues to grow.

Four of this year’s top ten slots are occupied by executives from the financial services sector — two from McLean-based mortgage giant Freddie Mac in addition to Cap One’s leaders. Freddie Mac’s CEO Leland C. Brendsel earned $22 million, snaring the No. 4 spot. Freddie Mac, which got its start with a charter from Congress in 1970, has evolved into a stockholder-owned mortgage powerhouse with an automated underwriting system that mortgage brokers around the country can access for a modest fee.

Familiar names from Old Economy companies rounded out the top tier. Dennis W. Bakke, CEO of AES Corp. in Arlington, the world’s largest independent power producer, came in at No. 10 with $12.8 million, all from stock sales. Bakke, devoutly religious, doesn’t earn a salary or bonus.

Notably absent from the list are women executives. There’s only one, Donna S. Morea, an executive vice president for American Management Systems, an information technology company in Fairfax. Morea, a member of the Fairfax County Glass Ceiling Task Force, came in No. 74 with total earnings of $1.8 million.

Altogether, Old Economy executives made a much stronger showing this year with executives such as Joseph W. Luter III, CEO of Smithfield Foods, moving up from 43rd to 16th place, commensurate with a rise in his total earnings, from $3.6 million to $8.6 million. Luter’s company, the largest hog producer and pork processor in the world, continues to diversify with acquisitions such as Packerland Holdings, Inc., the fifth largest beef processor in the U.S. Unlike the rest of his colleagues, none of Luter’s cash came from stock gains during fiscal 2000. Instead, the biggest part of his compensation came from his bonus, the porker of the list at $7.3 million.

Luter’s annual salary, $850,000, isn’t far behind the average of $924,691 paid to CEOs of Fortune 500 companies in 2000. The average bonus was $1.8 million while the average monetary valuation of stock option awards increased 62 percent from $8.6 million in 1999 to $14 million in 2000.

These figures, from a survey of 200 Fortune 500 companies done by Executive Compensation Advisory Services of Alexandria, begs the question: How can companies in Virginia and elsewhere continue paying top executives so much money at a time when a weakened economy has businesses fearing recession and laying off people by the thousands? "It takes just as much talent to lead in bad times as good times," observes Judith Fischer, managing director for the Alexandria company, a leading provider of information on executive compensation.

If the economy continues its unpredictable swings, elements of today’s standard pay package, including the increase in the value and number of stock options awarded, may have to be re-examined. "In terms of perks, the luxury perks are being de-emphasized ... The use of a corporate jet is increasing because of security considerations, and there’s more use of restricted stock," says Fischer. Unlike a stock option—the right to purchase company shares at a specific price during a certain period of time—restricted stock awards can be given or sold at a discount to an employee, who is restricted from selling or transferring it for a specified time, usually three to five years.

Rather than relying so heavily on stock options, companies could look to supplemental retirement plans as a way to attract and retain top executives. "With the value of the stock options being more volatile in the last few years, the supplemental programs are much more important, particularly for long-term retirement needs," says Heather Daniel, partner in the Richmond office of the Todd Organization, a nationwide executive benefits firm.

As executives struggle to meet aggressive goals during an economic downturn, companies might have to reconsider the practice of evaluating their performance based on stock market results. "We may be looking at more external performance goals, such as market share or developing new markets," says Fischer.

However, she doesn’t expect stock options to totally fall by the wayside. Now that executives are used to paper money that doesn’t go directly into their pockets, it would be hard to take it away. "We’ll continue to see stock options this year, but it will be more of a risk value than it was in the past." Since options don’t vest right away, Fischer tells her clients: "It’s an opportunity to participate in dollar cost averaging." Or dollar drops, depending on how long the bear market growls.

Return to Virginia Business - October 2001