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Earnings erosion

Nearly half of Virginia’s top public CEOs saw salaries drop or remain the same in 2009.

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Print this page by Garry Kranz

Salaries for chief executives at Virginia’s largest public companies remained relatively flat in 2009, at least on a percentage basis. The state’s top executives received an average salary increase of 0.2 percent, according to a study by Findley Davies Inc. for Virginia Business. (See entire Finley Davies Virginia CEO pay report.) That finding is in line with a recent report by The Wall Street Journal that found a decline of 0.09 in CEO compensation at 200 major U.S. public companies. 

Findley Davies, a human resources consulting firm, analyzed CEO compensation at 34 companies with annual revenue of at least $1 billion. Although the statistical average of all percentage increases came in at 0.2 percent, a closer inspection reveals that the base salary for Virginia’s execs fell nearly 2 percent, from an average of $881,000 in 2008 to $865,423 last year.

Overall, six of the top bosses saw salaries fall — by as much as 19.2 percent for Gannett’s Craig Dubow — eight salaries stayed the same as the previous year, and 16 CEOs got an increase ranging from 0.4 percent at Sunrise Senior Living to 17.4 percent at Universal Corp. (Three of the 30 execs are newcomers so there was no salary comparison, and Richard Fairbank at Capital One prefers to be paid in stock options rather than receive a salary.)

The biggest gainers: ManTech International Corp.’s George J. Pedersen received a 10.2 percent boost to $1.66 million, while Universal Corp.’s George Freeman snagged more than a 17 percent increase to $675,000. Excluding those two men, however, the average CEO base salary fell more than $4,000, to $860,300, during the past fiscal season.

The average salary figure applies to 30 Virginia executives who have occupied their positions for more than one fiscal year. Three CEOs — Jay L. Johnson of General Dynamics Corp., DynCorp International Inc.’s William L. Ballhaus and Walter P. Havenstein of Science Applications International Corp. — took the helm in 2009 but had not served at least one fiscal year at the time of the study. New to the list is VSE Corp., whose top boss, Maurice A. Gauthier, earned the lowest annual salary: $415,000.

CEOs at Virginia’s shareholder-owned firms collected average total compensation of $5.2 million in 2009, including salary, bonuses, equity and performance-based incentives. That’s down from $5.9 million in 2008. For all CEOs, average bonuses jumped a stunning 165 percent, but again, the average is skewed by a handful of CEOs who received unusually large cash awards. Excluding those outliers, CEO bonuses inched upward 1.3 percent, according to Findley Davies’ analysis.

The value of equity awards granted — considered a key component in performance-based pay plans — fell by 28 percent, but the average percentage decline was 32.7 percent. All told, Virginia execs got a combined $2.40 million in equity last year, compared with $3.34 million the year before. Declining stock values, transition to risk-based pay, or failure to hit performance goals are among a number of reasons that equity payments fell.

Generally, the pay of Virginia CEOs followed national trends regarding base salaries, annual incentives and equity awards, says Hank Federal, a principal with Charlotte, N.C.-based Findley Davies. “As in past years, there are interesting outliers that you always question based on the data provided.  The new SEC rules for transparency and ‘say on pay’ will over time give us additional insight as to why these exist.” 

However, Federal adds that even though the pay of Virginia CEOs mirrors national trends, “it is difficult to tell at this point whether that is a conscious effort on behalf of boards, or a reflection of the economy.”

CEOs at Virginia’s public firms, like their counterparts nationally, also are bracing for the impact of new federal laws on how executive compensation is calculated and reported. The laws are intended to create greater transparency, but there’s already concern that it will create the opposite effect.

“The proxies are going to contain so much more detail and complexity that I’m afraid nobody will be able to understand them,” says Pearl Meyer, an executive compensation consultant with Steven Hall & Partners in New York City.

That unfolding issue makes it difficult to draw any definitive conclusions heading into 2011.  Another thing to keep in mind when assessing this year’s compensation is that one-year shareholder returns aren’t the best barometer to judge whether a CEO’s pay raise was deserved. For many companies 2008 represented a low point in stock prices, and they suspended their dividend. Then stocks rebounded in 2009, making total shareholder return (TSR) look good. “To get a really accurate picture, you have to look back over a three- to five-year period,” Federal says. 

Massey Energy Co. chief Donald L. Blankenship, 60, received the highest payday: an eye-popping $12.2 million in salary and cash bonuses. That represents a one-year increase in total cash compensation of nearly 841 percent. Although Blankenship’s salary declined nearly 7 percent to $933,369, he collected nearly $11.3 million in bonus payouts, including performance-based cash awards that kicked in for prior years’ performance under Massey’s long-term incentive plan.
Factoring in stock options and other incentives, Blankenship’s estimated total pay could total $17.2 million — nearly 70 percent higher than a year ago.  “Blankenship heads a $2.6 billion revenue company but [Massey’s board] pays him like a much larger company,” Federal says.

Blankenship’s record payday comes as federal regulators investigate the cause of an April 5 accident at a Massey-owned mine in West Virginia that killed 29 coal miners.  (Reducing lost time to employee injury is among the performance-based metrics used to calculate Blankenship’s pay. The mining fatalities did not affect his 2009 pay, since Massey’s fiscal year had already closed in December, Federal says).

In terms of total estimated compensation, first-year CEO Jay L. Johnson at General Dynamics Corp. stands to make the most: as much as $20.58 million, according to Findley Davies. That includes stock and equity awards with a projected value topping $16.5 million, meaning much of the pay is tied to corporate performance.

According to General Dynamics’ calculation, Johnson’s estimated pay is $12.77 million, including the aggregated value of stock and options awarded in 2009. However, Findley Davies calculated the value of those options using a different method, based on an average of 40 percent of the exercise price, roughly equivalent to the results from many common stock option valuations.

Johnson, 63, assumed the helm when longtime CEO Nicholas D. Chabraja retired in July 2009. Johnson’s $1.12 million salary was supplemented by a cash bonus of $2.5 million, bringing his pay for 2009 to $3.6 million. The Falls Church-based maker of heavy military equipment posted net income of $2.04 billion on revenue of $31.9 billion.

Thomas F. Farrell II, the 55-year-old chief of energy giant Dominion Resources Inc., received a compensation package valued at $10.4 million, 11 percent lower than one year ago. His total cash compensation dropped 17 percent to $2.94 million (a $1.2 million salary and cash bonus of $1.74 million). The remainder of Farrell’s estimated compensation is tied to at-risk components, including $3 million in equity and $3.79 million in a long-term cash award.

On the other hand, Michael Laphen, 59, of Computer Sciences Corp. saw the total value of his pay deal soar by 23 percent to $9.49 million. That includes $3.5 million in cash and $5.8 million in equity awards.

Altria Group Inc., the parent company of cigarette maker Phillip Morris USA, paid boss Michael Szymanczyk $8.99 million last year, up 14 percent. Szymanczyk, 61, earned $4.28 million in salary and bonus money and $4.2 million in stock.

According to Findley Davies, Richard D. Fairbank of Capital One Financial Corp. in McLean earned $7 million entirely in options and performance-based shares. (That’s lower than the $11 million reported in Capital One’s March 18 proxy, which itself represents a one-year slide of 35 percent, the company says). Fairbank, 59, has opted for equity over a salary or bonus since 1997. In a report earlier this year, The Wall Street Journal reported that Fairbank earned the fifth-highest amount of compensation among executives at public companies during the past decade: $569 million.

Paul Saville at Reston-based homebuilder NVR Inc. suffered the biggest decline. The value of his pay tumbled from roughly $6 million to a shade above $1 million. Meanwhile, Charles “Wick” Moorman of Norfolk Southern Corp., who got $12.4 million a year ago, received $5.2 million, or a drop of more than 50 percent.

As was the case in 2008, Federal says Virginia companies last year seemed to have tied their CEOs’ compensation packages fairly closely to performance.  “Over the next several years, we expect to find an even closer correlation due to the additional scrutiny by investors” and regulators pushing for greater transparency in financial disclosures. 


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