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Turnover at the top
2005 saw lucrative deals for departing and arriving CEOs
by
Brett Lieberman
for Virginia Business
October 2006
It still pays to be the boss or to
retire at the top of the corporate ladder. That point
was apparent in Virginia
last year as a merry-go-round of executives rode into
the CEO suite to replace many longtime leaders who
stepped down from the day-to-day whirl of the company.
In fact, CEO titles changed at 13 of the 33 large public
companies surveyed by Virginia Business.
The turnover made it hard to spot year-to-year trends
in executive pay. Still, the issue continues to sizzle
on the nation’s front-burner as shareholders decry
the widening gulf between the millions earned by CEOs
compared to the wages of average workers. Plus, Congress
is threatening action in response to an unfolding stock
options scandal. Federal regulators are investigating
more than 100 companies (none with a Virginia address
so far) for allegedly backdating options to boost executive
pay and save on taxes.
To prevent future stock option
abuses, legislators may do away with a provision that
limits tax deductability on top executive salaries
to $1 million, unless the pay meets performance-based
requirements.
In Virginia, the exercise of stock option grants enriched
several CEOs last year. At Capital One Financial
Corp., Richard D. Fairbank took home $249.2 million
from such
grants, making him the highest-paid CEO in the state
for the second year in a row. The gains came on options
issued in 1995 that would have expired in 2005. Over
this 10-year period, Capital One outperformed some
other financial services companies with annualized
shareholder
return 24.6 percent according to the company’s
2006 proxy. Fairbank, 55, hasn’t taken a salary
or bonus in years, opting instead to be paid in performance-based
stock options.
The No. 2 spot went to Dwight C. Schar, former CEO
and continuing chairman at McLean-based NVR Inc.
He earned
a total of $63.2 million in fiscal 2005, with $61.2
million of it coming from stock option gains. Schar,
64, stepped
down as CEO of the home building and mortgage banking
company in June 2005 after a record year, with
revenues of $5.1 billion, up 22 percent from 2004.
By staying on as chairman (through Jan. 1, 2011
according to NVR’s most recent proxy), Schar could receive
a minimum base salary of $2 million a year and an annual
bonus of up to 100 percent of the base salary. At his
request, however, the company dropped Schar’s salary
by $500,000 (or 25 percent) on Jan. 1 of this year, to
reflect the change in his title.
As executives reach retirement, some see their
earnings peak. After serving as CEO and president
since 1992,
Norfolk Southern’s David R. Goode retired last
November and relinquished his position as chairman in
February. During the last two years at the helm, he received
a bonus double his $1 million salary, plus healthy stock
options gains — enough to rank Goode the fifth
highest paid Virginia CEO in 2005. As part of his retirement
agreement, Goode, 65, agreed to provide consulting services
for five years, which entitles him to enhanced retirement
benefits.
In addition, the Norfolk-based railroad company
named its 12-story Atlanta office building
after Goode.
He oversaw Norfolk Southern’s merger with Conrail
and through some rocky financial periods, before leaving
the company in good financial shape.
Meanwhile, new CEO Wick Moorman, 54, got
a boost in annual salary from $650,000
in 2005
to $750,000
at
the beginning
of 2006 in recognition of his promotion.
That puts his base salary below the 25th
percentile
of salaries
paid
to CEOs of other U. S. corporations of
comparable size, says the company’s proxy. But it’s double
what Moorman was earning in 2004. Moving up to CEO also
netted a nice increase for Theodore L. Chandler Jr. at
Richmond-based LandAmerica Financial. Chandler took over
in January of 2005, and earned a salary of $575,000 and
a $1.1 million bonus last year — 81 percent more
than his 2004 earnings of a $400,000 salary and a $551,000
bonus.
Coal fortunes made Dan L. Blankenship the
third-highest-paid CEO last year. The
president, CEO and chairman
of Richmond-based Massey Energy Co. took
home the fattest bonus in 2005: $11.4
million. The bulk of it, $10 million,
was a deferred incentive bonus that vested
at the end of 2005. With high energy
prices driving up the demand and price of coal, Massey’s revenue increased
last year as well.
Combined with $1 million in salary, Blankenship earned
$12.4 million, more than a 600 percent increase over
his 2004 salary/bonus
package
of $1.6
million. Blankenship, 56, also received $15 million in a
long-term incentive payment
last year for a total of $28.2 million.
The largesse came during a year when the company saw
historically high coal prices, but reported a $101.6
million loss (or
$1.33 a share)
related to
a debt repurchase and exchange offer. In 2006, the year
got off to a rough start
with the death of two miners in January in a beltline fire
in Logan, W. Va. Then this spring a dissatisfied shareholder,
critical
of
Blankenship’s
salary, perks and other management issues, gained two seats on Massey’s
board.
On the whole, executive pay grew twice
as fast as the wages and benefits of U.S. workers last
year. Yet more and more
of the
big paychecks
are “at
risk,” tied to performance benchmarks. “The move has been to true
pay for performance,” says Bruce Ellig, a New York-based human resources
consultant and former chairman of the Society for Human Resource Management,
who advises companies on compensation deals. “I don’t know that
we’re there yet, but it’s better.”
Companies are moving away from contracts that offer
stock options and other incentives with few strings
attached.
Instead, they
are moving
toward performance
shares that tie bonuses and long-term payouts to measurable
benchmarks such as profits, earnings per share, return
on assets and, in
a few cases, stock
performance.
Actually, CEO pay slowed down in 2005, according to
one well-known survey. Direct compensation — salary plus bonus — rose
7.1 percent from 2004 to a median of $2.4 million last
year, according to a Mercer Human Resource
Consulting study of proxy filings at 350 large public
companies. That boost exceeded the 3.6 percent climb
in pay for white-collar staffers, said Mercer.
Yet, it was far below the 14.5 percent bump in salaries
and bonuses CEOs received a year earlier in 2004.
The more modest growth may mean that
executives and compensation committees are finally paying
attention
to shareholder
concerns about excessive
pay. “The
close alignment of pay and performance reflected in the 2005 Mercer survey
numbers indicates that organizations are moving toward more responsible executive
compensation,” Peter Chingos, a senior executive
compensation consultant with Mercer, says in statement
accompanying the report.
In Virginia, some executives saw a drop in pay
last year. At Amerigroup, for instance, CEO Jeffrey
L.
McWaters received 67.6 percent less
in salary and
bonus, because he and other top executives weren’t awarded bonuses in
2005. Financially that was a tough year for the Virginia Beach company, which
provides managed health care services to Medicaid patients for the public sector.
Its stock price plummeted more than 40 percent in September of 2005 after the
company said that it would post a third-quarter loss and not make expected
earnings due to higher medical costs. The loss prompted shareholder lawsuits,
alleging that the company and some of its senior officers misrepresented Amerigroup’s
financial condition and inflated share prices. The suits
have been consolidated into a class, and the company
plans to fight the allegations in court.
Corporate boards are already going to greater
lengths to provide more transparency and to
explain compensation
packages,
particularly
in
light of upcoming
changes in the law which will force them to
do so. The emerging scandal about possible
backdating may throw cold water on stock options
as well. Ellig, author of “The
Complete Guide to Executive Compensation,” and
other experts say companies may shy away from options
to avoid getting tangled in the mess, which could
result in criminal charges as well as shareholder lawsuits.
Plus, options are becoming more expensive now
that companies are forced to expense them
immediately, a change that
takes effect for fiscal
2006 reporting. “The
biggest trend I see is the emergence of these long-term incentive programs.
Where historically they were based on large option grants, they are moving
away from them,” says Robert McHale, a senior partner
in the Tysons Corner office of the Korn/Ferry consulting
firm.
New disclosure rules proposed by the U.S.
Security and Exchange Commission, which
should take
effect next year,
are expected
to have a profound
impact on executive compensation and perks.
Since companies will have to disclose
details as small as car allowances, many
perks may fall by the wayside. “They
don’t stand the face of scrutiny. If you’re paying $10 million
to your CEO, why can’t he pay for his travel and perks?” says
Ellig.
Improved disclosure could make company
directors and executives more responsive
to shareholder
and watchdog
complaints.
At Smithfield Foods annual meeting
in August, a representative from a union
retirement plan spoke in
favor of a proposal to do away with stock
options as part of the company’s structure
for executive bonuses. He complained about the millions in bonuses outgoing
CEO Joseph W. Luter III received in recent years — $9.8
million and $3.8 million during the last two fiscal years.
The measure failed on a majority
vote, but new CEO Larry Pope says the company will study
the matter.
Looks like next year’s proxy season could provide
for some interesting reading.
Biggest gainers in 2005
• Biggest bonus: $11.4
million, Dan Blankenship, Massey Energy
• Biggest annual salary: $2 million, Dwight Schar, former
CEO, NVR
• Biggest stock option gains: $249.2 million, Richard D.
Fairbank, Capital One
• Best cumulative five-year shareholder return: 548 percent,
CACI International
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