Reports CEO Pay

Mixed message

Average salary and bonus rose in 2011, but total CEO compensation dropped 21 percent

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Print this page by Garry Kranz

Despite lingering economic worries, CEOs at Virginia’s largest, publicly traded companies didn’t make out too bad in 2011. Base salaries increased 4.9 percent, although some CEOs such as Mark DeYoung of Alliant TechSystems Inc., garnered raises as high as 25 percent. Meanwhile, median cash bonuses grew 4 percent, and performance-based equity incentives gained prominence, according to a study by Equilar Inc., an executive compensation data firm.

Virginia Business commissioned Redwood City, Calif.-based Equilar to analyze CEO compensation at public companies in the state with at least $1 billion in annual revenue. The study showed that the average base salary for CEOs at these companies last year was $886,278, compared with $913,771 in 2010. (On a percentage basis, though, salaries were higher year over year when six CEOs who did not serve two complete fiscal years are excluded.) However, executives saw their average total compensation plummet 21 percent to $6.4 million. (see chart)

CEO pay trends in Virginia mostly fell in line with those at public companies throughout the country. Nationally, top execs saw their base salaries climb 5.7 percent to edge above $1 million, according to a broader Equilar report on 322 companies, “S&P 500 CEO Pay Study for 2012.” It says median executive compensation grew 6.2 percent year over year to $9.6 million, up from $9 million.

In another compensation study released in May, The Wall Street Journal/Hay Group report said CEOs at top U.S. public companies on average pocketed overall cash compensation of $3.6 million in 2011, essentially unchanged from the previous year, despite the fact many corporations posted stronger profits. 

Regardless of how the data gets sliced, top U.S. execs fared better than the average American worker, whose annual wages increased only 2.8 percent last year, according to WorldatWork, a Washington, D.C.-based trade group.

Virginia companies continued a shift away from cash payouts in favor of a risk-and-reward strategy that tied CEO compensation to objective performance targets, says Aaron Boyd, Equilar’s director of research. Virginia CEOs received average equity awards of $3.5 million last year, up from $2.9 million in 2010.

“Companies are looking to give more equity and reduce cash awards,” Boyd says. “The thinking is that, if the stock falls, the CEO suffers along with the shareholders,”
The new approach gave some CEOs a wallop. Paul C. Saville, 56, top boss at homebuilder NVR Inc. in Reston, received total compensation of $807,850 last year. That’s a staggering 97 percent decline from his 2010 package of nearly $31 million, of which $29.5 million came in stock options that are worth less now than on the date they were granted.  Saville’s pay drop underscores the headwinds facing the housing market, despite incipient signs of a recovery.  For 2011, Saville’s $800,000 salary remained unchanged, and he did not receive any bonuses.

In its research for Virginia Business, Equilar found that 15 CEOs pocketed a pay raise while 12 executives saw their base pay remain flat. The biggest bump went to Alliant TechSystems’ DeYoung, 53, whose pay increased 25 percent to $917,308, compared with $735,000 in 2010. Alliant moved its headquarters last year from Minneapolis to Arlington.
Next in line was the 51-year-old Kevin Crutchfield at Alpha Natural Resources with an 18 percent raise that pushed his salary to $1.03 million. Alpha’s acquisition of Massey Energy Co. last year made it the second-largest coal company in the nation with $7.1 billion in revenue. Crutchfield also earned a $528,000 bonus, 65 percent below his 2010 bonus.

Other CEOs posting strong salary gains included Steven P. Dussek, 55, of NII Holdings Inc., whose $865,732 salary increased 15 percent year over year, and Dollar Tree Inc.’s Bob Sasser, 60, whose pay went up 11 percent to $1.08 million.

There was a shuffle in Virginia’s executive suites, too. Of the 34 companies studied, six appointed a new CEO while five saw their chief exec step down or announce plans to do so by the end of 2012. Six CEOs had not completed two complete fiscal years as head of publicly traded companies: Andrés R. Gluski of AES Corp., J. Michael Lawrie of Computer Sciences Corp. (CSC), David F. Melcher of ITT Exelis, Gracia C. Martore of Gannett Co., C. Michael Petters of Huntington Ingalls Industries and Thomas C. Schievelbein of The Brink’s Co.

ITT Exelis and Huntington Ingalls became separate, publicly traded companies last year after being spun off by ITT Corp. and Northrop Grumman Corp., respectively.
Alliant Techsystems, ITT Exelis and Huntington Ingalls made their first appearance on the list this year, as did Northrop Grumman Corp. (which moved its headquarters from Los Angeles to Fairfax County last year) and James River Coal Co.

In terms of overall value, Northrop Grumman CEO Wesley G. Bush, 51, led the way with a total pay package that approached $21 million. As Northrop Grumman completed its relocation last year, Bush got a 10 percent salary bump to $1.47 million and a performance-based cash bonus topping $4 million, up 33 percent. Nearly $13 million of Bush’s compensation came in the form of long-term stock grants or options tied to performance metrics.

Between the performance bonus and equity awards, 92 percent of Bush’s direct total compensation was incentive-based, the company said in its proxy.

Smithfield Foods Inc. CEO C. Larry Pope pulled down the highest guaranteed pay: $14.3 million in salary and cash bonuses. The pork processor boosted sales 7 percent to $13 billion last year, producing net income of $361 million, which was the second-highest total in the 76-year-old company’s history. Shareholder returns grew by 26 percent.
Pope’s $1.1 million base pay did not change year over year, but his $13.2 million bonus reflects a one-year surge of 784 percent. Pope also netted $4.2 million worth of Smithfield stock, bringing his total annual compensation to $18.7 million.

Richard D. Fairbank, 61, the CEO at McLean-based Capital One Financial Corp., collected $18.7 million in total compensation, with nearly all of it ($18.5 million) in stock and long-term equity. As has been his custom, Fairbank prefers to forgo a salary in favor of shares of Capital One stock. Performance-based shares represent 50 percent of Fairbank’s total target compensation, making it “twice the percentage represented by performance shares in the 2011 CEO comp package,” according to Capital One’s proxy in March.

Another big winner was Jay L. Johnson, the 65-year-old head of defense contractor General Dynamics Corp. In 2011, Johnson’s total compensation rose 17 percent to $16.06 million. Of that amount, $10.5 million stemmed from performance-based stock awards. Johnson, who is retiring in December, took a 2011 cash bonus of $3.6 million bonus, up 16 percent from $3.1 million in 2010. His salary of $1.4 million did not change.

Energy giant Dominion Resources conferred total compensation worth more than $12 million on its 57-year-old CEO, Thomas F. Farrell II. That included a $1.2 million base salary, a $1.1 bonus, multiyear cash incentives of $6 million and equity awards valued at $3.5 million. On a year-over-year basis, Farrell’s total compensation actually fell 19 percent.

Raw numbers don’t always tell the entire tale, Boyd says. For example, the total pay given to since-retired CEO Michael E. Szymanczyk of Altria Group fell 51 percent from $20.7 million in 2010 to $10.2 million last year. The change reflects Altria’s strategy of paying long-term cash incentives over multiple years, Boyd says.

In addition to Szymanczyk and General Dynamics’ Johnson, chief executives at two publicly traded defense contractors also announced their retirement plans: Paul M. Cofoni of CACI International and Walter P. Havenstein of Science Applications International Corp.  (SAIC).

Also stepping down was Michael D. Fraizer, the founding CEO at Genworth Financial Inc., who departed in May, and Craig Dubow at Gannett, who resigned last year for medical reasons. Dubow’s departure cleared the way for Martore, the only female CEO on the list.

Directors at the 34 Virginia companies last year implemented “say-on-pay” shareholder votes on executive compensations. Although nonbinding, the advisory votes are mandated for all public companies by the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010. None of the say-on-pay votes here resulted in changes being made to CEO compensation packages.

In fact, while say on pay is routine, experts say it has yet to make much impact in reshaping executive pay at U.S. companies.

“Companies don’t appear to be having trouble getting shareholders to approve executive compensation,” with only 1 percent to 2 percent of say-on-pay votes reversing pay proposals, says Mike Halloran, a compensation consultant with New York-based Mercer Inc.

Another aspect of Dodd-Frank is still developing: so-called “clawback” policies, which enable companies to recover executive compensation in the event of financial restatements or ethical misconduct by its top executives.  Although a requirement for all public companies, securities regulators have yet to finalize clawback provisions.

“That’s making it hard for compensation committees to plan for 2013,” says Alan A. Nadel, a compensation expert and principal at Buck Consultants in New York.

Economic uncertainty, coupled with Wall Street protesters and still-emerging regulations, have the potential to intensify the spotlight on executive pay in 2013. The outcome of the presidential race could be a factor as well. Experts predict Virginia’s public companies, and their counterparts nationally, will fine-tune their focus on performance-driven executive compensation. “Companies are engaging shareholders more directly and explaining why they paid their CEOs what they did,” Boyd says. “That’s creating better dialogue and feedback on pay and policies. And that’s a good thing.” 

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