Return to Virginia Business - October 2004

Companies continue to reward CEOs as they rethink executive pay

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by Brett Lieberman
Virginia Business
October 2004

With business and shareholder returns looking up, pay for Virginia CEOs is up as well, following a couple of years of restraint. After the recession of 2001, many boards in Virginia and across the country reigned in pay for top executives. Yet last year saw double-digit raises for some CEOs, despite continuing concerns about the economy and public outrage over excesses, such as the firestorm that forced the resignation of Dick Grasso, the former chairman of the New York Stock Exchange. He stepped down after critics questioned the governance of a non-profit board that rewarded him with a compensation package of nearly $200 million, action that prompted a lawsuit by New York’s Attorney General.

The Grasso controversy this past spring followed a couple years of stagnant raises with some executives passing on increases until stock performance improved. Stronger equity markets produced a median one-year total shareholder return (TSR) of 26.9 percent in 2003, a big improvement over the 5.9 percent median TSR in 2002.

So maybe it shouldn’t come as much of a surprise that the compensation nationwide for CEOs rose by a median of 15.04 percent in 2003 to $642,641 for salaries and total compensation worth more than $1.8 million, according to a recent survey of 1,429 CEOs by The Corporate Library, which monitors corporate governance. Another study done annually by Mercer Human Resource Consulting of 350 of the largest U.S. public firms found the median salary and bonus for CEOs rose 7.2 percent to $2.1 million. Yet, the median for total direct compensation, including long-term compensation and options, was flat at $6.2 million, when compared to 2002.

In The Corporate Library study, CEOs whose companies are in the Standard & Poor 500 fared especially well, seeing their total compensation increase a median of 22.18 percent. In Virginia, executives at S&P 500 firms took home a median total compensation of $8.5 million last year, while those at non-S&P 500 companies earned a median total compensation of just over $1.2 million, according to the survey, which broke down compensation at the state level for the first time. The median refers to the mid-point, meaning that half the salaries are higher and half are lower. Even at the lower end, executives are making out far better than the average worker whose median income dropped 3.4 percent since 2000 due to the weak stock market, layoffs and stingy raises.

Rather than modest pay increases as corporate revenues showed improvement, Paul Hodgson, a senior research associate who tracked the pay of CEOs at The Corporate Library, found a dramatic swing in compensation. “Stockholders have started to make money again, and once people start making money again and the dichotomy between stockholders losing money and executives gaining is lost, people seem to forget and go back to their old ways,” he says.

Yet it’s unfair to paint too broad of a picture. Many of last year’s top Virginia earners benefited from a strong business performance. Those faring best were in real estate, finance and telecommunications as well as the leaders of some old guard companies such Norfolk Southern, General Dynamics and Dominion Resources.

To determine the top-paid execs at public companies in Virginia, Virginia Business analyzed pay from each company’s most recent fiscal year as of July. Our calculations of total compensation — based on information in the proxy — include salary and bonus, stock gains comprising long-term incentive payouts, restricted stock awards and the value realized of stock options, plus all other compensation. (See pages 78 and 80 for a chart of the 100 highest-paid executives.)

Occupying three of the top four spots on our list are executives from McLean-based NVR Inc., one of the country’s largest homebuilding and mortgage banking companies. A booming real estate market pumped up the homebuilder’s earnings as evidenced in the 27 percent increase in net income on sales of more than 12,000 homes last year. That pushed NVR’s share price from $337 to $466, helping Chairman and CEO Dwight C. Schar take home $58 million mostly on stock gains. Still for Schar, whose salary and bonus accounted for only about $3.2 million, it was a down year compared to 2002, when he took home $94.3 million after exercising stock options, finishing in the top spot on the list.

And Schar was hardly alone. After exercising stock options, NVR Mortgage President William J. Inman took home about $40 million, yet had a salary and bonus of only $720,000. Similarly, Executive Vice President Paul C. Saville’s $900,000 in salary and bonus appears paltry next to his nearly $37 million in stock gains.

While the stock market remains volatile, many of this year’s top earners locked in their spots on the list thanks to solid stock performance. At the top of this year’s list is Capitol One’s former Vice Chairman Nigel W. Morris, who nearly tripled Schar’s earnings with $147.2 million on stock gains, despite not receiving a dime in salary or bonus. Morris, Capital One’s cofounder and former COO, stepped down in 2003, citing the desire to spend more time with his family. He left the board in 2004, but his longtime association with the company paid off when he sold millions of shares of stock to diversify his financial assets, netting him the $147 million.

Coming in at No. 5 was Nextel Communications President and CEO, Timothy M. Donahue, who benefited from a good year as the Reston-based company’s stock price was up about 133 percent on earnings that increased nearly 11 percent to $1.5 billion in 2003. As a result, he took home $26.3 million, largely on $22.6 million in gains from stock as one of the state’s few telecommunication companies continued to do well in the telecom sector.

Of the top 20 CEOs on this year’s list, only executives from Friedman, Billings, Ramsey Group Inc. earned most of their compensation from salary and bonus alone. Co-CEOs Emanuel J. Friedman and Eric F. Billings each made a salary of $480,000 and received a bonus of $8.9 million — the highest in the state — for total annual compensation of $9.4 million. More women are finding their way on the list, with four executives this year from Sunrise Senior Living, SLM Corp., LandAmerica Financial Group and Capital One Financial. Of this group, 41-year-old Tiffany L. Tomasso, Sunrise’s COO, made the most at $6.7 million, with the bulk of her earnings in 2003 coming from the exercise of stock options which netted $5.3 million.

In response to corporate scandals and recent regulatory and legal actions, many companies are restructuring their executive compensation packages. Stock options, once popular as a way to reward executives — particularly before the dot-coms and the market bubble imploded — are now a pariah among many firms. “Options have been tainted,” says Nels Olson, who manages the Tysons Corner and Washington, D.C., offices of executive recruitment firm Corner Korn/Ferry International. “They’re looking for alternative ways to compensate their team.

The public’s negative perception toward options and the reminders they bring of the high-flying ’90s is only part of the reason for the shift to cash and stock compensation. The need to begin expensing options next year unless Congress steps in to bail business out is also a major reason. Options used to be passed out like candy as an incentive for performance, but they could prove costly when companies have to include the cost on their balance sheets.

The popularity of options has also faded with executives because many are below current market values. “The currency value of options has declined markedly,” says Steve Harris, a partner at Mercer Human Resources Consulting. Nobody is predicting the mammoth growth in equity values in the next decade that was seen in the 1990s. “They are much more sober in their view,” Harris says.
Institutional investors are also putting pressure on companies to phase out or limit stock options because they do not want to see tens of millions of dollars in options further watering down their investments. As companies and executives steer away from options, many businesses are looking at creative ways to compensate and attract top talent. They are turning to restricted shares, cafeteria-style plans where executives are given choices such as restricted shares, long-term compensation and larger cash payouts through bonuses and salary. And with options’ value in question, many executives are willing to trade $100,000 worth of options for a guaranteed $75,000 in restricted stock, says Harris.

Ruble Hord, a partner at the Todd Organization, a Richmond firm that helps companies design executive benefits, says corporate boards are more cautious these days as they structure compensation in seeing that some of the changes being implemented, such as profit-sharing plans and other creative incentives, benefit all employees, not just the top executives.

While Korn/Ferry’s Olson says pay packages like the one Grasso received are the exceptions — “You’re going to see far less of the Dick Grasso’s in the world than you have in the past” — others are less optimistic. Former Federal Reserve Bank of New York President William J. McDonough, who chairs the Public Company Accounting Oversight Board created by Sarbanes-Oxley, has become an outspoken critic of paychecks that he says are based on pure greed. While the average Fortune 500 CEO made 40 times more than the average person who worked for him in 1980, the ratio grew to 530 times by last year. “There is no economic theory on God’s planet that can justify that,” McDonough told lawmakers this summer, calling it “a breakthrough of greed in the 1990s.” Corporate boards and CEOS need to exercise common sense to rein in exorbitant salaries, says McDonough.

Corporate directors are getting the message loud and clear, says Harris of Mercer Human Resources Consulting. Some companies are moving to performance-based stock grants, with grants not vesting or gaining in value unless certain performance goals are met. Such change represents real reform. Yet when executives continue to receive raises seven to 10 times greater than their workers, that’s hardly an encouraging sign.

Return to Virginia Business - October 2004