Reports CEO Pay

Earnings erosion

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Print this page by Garry Kranz

Click here to view The Findley Davies Virginia CEO Pay Report

It’s still good to be the chief executive, even in a lousy economy. Although 2008 marked the start of a bruising global recession, many CEOs at Virginia’s largest publicly traded companies saw base annual salaries rise by an average of 5.7 percent. 

The figure is for execs in their positions for more than one fiscal year.  They earned an average salary of $920,957, according to a study conducted by Findley Davies Inc. for Virginia Business.

Overall, though, pay packages — including cash bonuses, stock awards and other incentives — fell flat. The average total compensation package for all CEOs was $6.06 million. That’s nearly identical to the 2007 total of $6.1 million and reflects reduced earnings at many of the state’s largest shareholder-owned firms.

The study examined compensation at companies with revenue of at least $1 billion. Of the 32 companies, 26 had CEOs in jobs for more than one fiscal year.  Just more than 60 percent of these execs received base salary raises of 3.5 percent or more, says Hank Federal, a principal with Findley Davies, the Charlotte, N.C.-based-based human resources firm that compiles the annual ranking. 

“That’s a little higher than average,” notes Federal. “And it’s more than the average worker received during 2008 as companies were cutting jobs, salaries and contributions to 401(k) plans.” 

Still, Federal says raises in Virginia generally tracked a company’s performance. CEOs who got better-than-average raises usually presided over companies that managed to meet or exceed their performance targets in a difficult year. Conversely, about 40 percent of CEOs got smaller raises — and in some cases none at all — because their companies failed to hit the mark. (See chart on 53 for a more specific breakdown.)

Of the 26 CEOs, 18 received an increase in total cash compensation. Among this group, five headed companies with an increase in total shareholder return, while 13 saw shareholder values dip, sometimes dramatically.

Looked at another way: 14 of the 18 CEOs presided over companies that posted gains in fiscal year revenue, with 11 also posting a bump in net income.

Among the eight CEOs who saw a drop in total cash compensation, seven saw decreases in total shareholder return, five saw reductions in revenue, and seven in this group saw drops in net income. 
There was plenty of company in the minus column. The average one-year total shareholder return for Virginia’s 32 largest publics in 2008 was -31.79 percent. The average total return vs. the S&P 500 was 5.57 percentage points higher. 

The severity of the worst economic downturn since the Great Depression is apparent in the reduced number of companies on this year’s pay chart. Last year, Findley Davies examined pay at 40 publics that surpassed the $1 billion revenue mark. Some of those companies aren’t around today. Circuit City Stores Inc. closed all of its stores in March. Also gone is BearingPoint Inc., a McLean-based consulting company, which filed for Chapter 11 bankruptcy protection and is selling off pieces of its business, and the Federal Home Loan Mortgage Corp. (Freddie Mac), which was taken over by the federal government after the subprime crisis.   

In keeping with a national trend, Virginia companies are basing more of a CEO’s pay on the achievement of clearly established performance goals. On average, Federal says that three-quarters of a CEO’s annual pay is tied to long-term incentives such as equity- or performance-based cash rewards. “Overall, the compensation committees at Virginia’s companies did a really nice job of aligning CEO pay to company performance. It’s a much better story than in most other states.”

Yet tying pay to performance is an inexact science during market turbulence.  James E. Rogers serves as a director on the boards of two Richmond-based firms, NewMarket Corp. and Owens & Minor Inc. “As we’ve all experienced during the last year, stock prices can fluctuate wildly, even though a company’s performance is solid,” says Rogers, a member of the compensation committee at chemical maker NewMarket and lead director at Owens & Minor. Rogers is president of Richmond-based private equity firm SCI Investors Inc.

The pay-for-performance trend is evident in the compensation of Norfolk Southern Corp. CEO Charles W. Moorman, Virginia’s second highest-paid public CEO in 2008. The Norfolk-based railroad giant awarded Moorman, 57, a combined pay package valued at $12.4 million, or 1.2 percent less than the previous year.

That does not mean Moorman will necessarily take home all $12 million. A higher proportion of Moorman’s annual compensation (51 percent) is considered to be “at risk” should the company fail to meet certain financial goals established by its compensation committee.

Moorman’s total fixed compensation — money he is guaranteed to receive for 2008 — is $2.7 million. That includes a 19 percent increase in salary to $950,000, as well as a $1.75 million cash bonus. The bonus is 104 percent higher than the $862,400 bonus Moorman received last year. In context, it reflects “non-equity” cash incentives he earned between 2006 and 2008, and which he received on a current or deferred basis, according to the company’s proxy.

For fiscal year 2008, Norfolk Southern reported net income of $1.7 billion and revenue of $10.6 billion. Although one-year shareholder return was -4.3 percent, Norfolk Southern shares outperformed the S&P by 34 percentage points.

Also getting a healthy payday last year was Michael Quillen, the 60-year-old chairman and former CEO of coal-mining company Alpha Natural Resources in Abingdon.
Quillen relinquished the CEO title to Kevin Crutchfield after Alpha merged this summer with Foundation Coal Holdings, based in Linthicum Heights, Md. The deal turned Alpha into the nation’s third-largest coal producer.

In 2008, Quillen’s total compensation was valued at $4.97 million. That compares with $3.06 million in 2007, or a one-year increase of 62 percent.

Quillen’s fixed pay — the combination of annual base salary and cash bonus — rose 90 percent. While his salary of $689,432 represented only a 3.9 percent increase, the pay package was greatly helped by deferred cash bonuses. Including an annual bonus and other cash awards earned between 2006 and 2008, Quillen’s bonus money totaled $2.35 million, or 151 percent higher than the year before.

Quillen guided Alpha through a tough stretch in the coal industry. Falling prices for fossil fuels last year dragged down the share prices of coal stocks. In addition, a proposed acquisition of Alpha by Cleveland Cliffs Inc. was called off in November. Cleveland Cliffs agreed to pay Alpha $70 million to terminate the contract.

Despite the turmoil, Alpha’s revenue grew more than 36 percent in 2008, up to $2.55 billion from $1.877 billion the year before.

While shareholder say-on-pay movements have been ongoing in recent years, public rage over excessive executive pay hit new levels this year. Much of the uproar was directed at huge bonuses paid to bankers and executives of companies like AIG, which received billions in federal bailout money, while the U.S. economy was faltering. 

Besides heightened public sensitivity, Virginia boards of directors continue to adjust to stricter disclosure rules enacted in 2006 by the U.S. Securities and Exchange Commission. The changes are intended to make executive pay more transparent. 

More changes appear to be on the way with the SEC proposing additional new regulations.  The economy is a big driver, says Federal. “People are saying, ‘Wait a minute. How come executive compensation keeps going up when everybody else is losing their job?”

Incentive bonuses and other performance-based variables, he continues, came into favor during the last 20 years. “My question is have we taken this thing too far? Have we made the reward systems so big that we have created overly risky behavior?” 

Rogers says he welcomes the increased disclosure. “The detail and energy that goes into understanding and disclosing compensation today is far greater than it was. And that’s been a positive development.”

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