Reports CEO Pay

Sluggish economy drags down CEO pay

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By Garry Kranz

Their earnings power took a hit last year. Still, the CEOs of Virginia’s largest public companies made out pretty well. The men who run Virginia’s largest shareholder-owned firms received an average compensation of $6.1 million in 2007, including base salary, cash bonuses, stock and long-term incentives, according to an annual study commissioned by Virginia Business.

That’s a decline of 15 percent from a 2006 average of $7.2 million. The study examined CEO pay at public companies with at least $1 billion in annual revenue.

Overall, the drop here mirrors what is happening nationally. A May study by Mercer Human Resource Consulting found that CEO pay at the largest U.S. public companies fell 15.8 percent during the past year. Boards of directors have gotten the public’s message that executive pay needs to be driven by performance, according to Mike Halloran, a compensation consultant with Mercer, which is based in New York City.

Shift from cash payouts
Among compensation committees in Virginia,  there’s a shift away from straight cash payouts in favor of a mix of bonuses and performance-vesting equity, observes Henry Federal, a principal with Charlotte, N.C.-based Findley Davies, a human resources consulting firm that compiled the data for Virginia Business. That puts more of a CEO’s yearly pay “at risk” if predetermined performance targets aren’t met.

Many companies saw drops in shareholder returns in 2007 as the economy sputtered in response to the subprime mortgage crisis. In fact, that was the case at two of the three Virginia companies with the highest paid executives. Even so, their CEOs managed to net reported compensation packages ranging into eight figures. 

Compensation of CEOs at Virginia’s public companies with annual revenue of at least $1 billion (part I)

Compensation of CEOs at Virginia’s public companies (part II)

At the top of Virginia’s pay scale were Capital One Financial Corp.’s Richard Fairbank at $20.4 million, General Dynamics’ Nicholas Chabraja at $18.5 million (whose 2007 shareholder returns were positive) and Freddie Mac’s former CEO Richard Syron, at $18.2 million. Syron was ousted last month after the federal government took over Freddie Mac and Fannie Mae, in one of the biggest bailouts in history. (Louis Camilleri actually topped the list at $24 million. However, he was leading Altria Group Inc. at the time, then based in New York, before its spin-off of Philip Morris International and Altria’s corporate relocation to Richmond.) 

While Fairbank led the pack, the value of his compensation fell by nearly half from $37.4 million in 2006. Meanwhile, Capital One’s stock has taken a drubbing, with one-year shareholder values down 38 percent amid turbulence in U.S. financial markets.

Fairbank gets paid solely in equity. The $20.4 million reflects the value of Fairbank’s 2007 compensation. (Under revised securities regulations, companies must account for the value of such shares as an expense against their fiscal year earnings). For 2008, Capital One’s board authorized an equity package for Fairbank consisting of 1.66 million stocks options, worth $17 million on the date they were granted.

Freddie Mac’s situation
Syron ran McLean-based Federal Home Loan Mortgage Corp. for nearly four years before his removal on Sept. 7. He’s expected to remain during a transition period. The government’s decision followed billion-dollar losses by Freddie and Fannie and fears that the federally chartered companies did not have enough of a financial cushion to continue absorbing losses from subprime mortgage defaults. 

The mortgage finance giants own or guarantee about three quarters of the country’s new mortgage loans. Syron was hired in 2004 to clean up the aftermath of a major accounting scandal that torpedoed two of Freddie Mac’s top executives. Under Syron’s watch, Freddie bought pools of subprime loans, the housing market crumbled and shareholders saw their values erode 47 percent in 2007, according to Findley Davies’ research. (See report on page 71 for a more complete report on stocks.) 

The roiling mortgage crisis was enough to chase away Syron’s presumptive heir apparent, Eugene McQuade, who abruptly rejected the job in May — long before the bailout. At that time, Syron planned to step down at the end of the year, but agreed to stay on through 2009 to help find a successor.

Last year, his base salary grew 9 percent to $1.2 million. Augmenting his salary was a cash bonus of $3.45 million, which included a $2.2 million performance bonus and special one-time payment of $1.25 million for remaining aboard an extra year.

The $18.2 million compensation (up $4 million from the $14.7 million reported in 2006) reflects the value of Syron’s pay in accordance with required accounting regulations, but it’s not what he earned, points out Sharon J. McHale, the company’s vice president of public relations. Syron actually made $10.58 million, based on the value of exercised stock options and restricted stock that vested in 2007, according to McHale.

Syron’s $2.2 million cash bonus for fiscal 2007 (not including the extension payment) represents 66 percent of his bonus target of $3.36 million. It was lowered because of the company’s poor financial performance last year, says McHale. With his departure, it’s not clear if Syron will receive a separation payment. The government has said Freddie Mac and Fannie Mae cannot pay the departing executives “golden parachutes.” However, a new law limiting such pay could be contested.  Plus, the huge drop in Freddie’s share price will decrease the value of Syron’s stock awards.

A raise at Dominion
Not every company is cutting back. Dominion Resources Inc., the parent company of Dominion Virginia Power, gave CEO Thomas F. Farrell II annual compensation valued at $15.1 million. That is double the $7.3 million he received the previous year.

Farrell’s base salary alone grew 10 percent, from 1 to $1.1 million, bringing it in line with that of CEOs at comparable companies, according to the company’s proxy. Farrell took over as CEO in 2006.

Altogether, Farrell, 53, received $8.5 million in performance-based cash awards. That includes a one-time payment of $2 million for his role in a series of complex divestitures. Dominion in 2007 sold off most of its exploration and production assets in natural gas and oil, including onshore properties in North America and offshore properties in the Gulf of Mexico. The sales generated nearly $14 billion in proceeds. Dominion used the after-tax money to reduce debt and repurchase shares, says Dominion spokesman Mark Lazenby.
Additionally, Farrell garnered a $2.4 million cash bonus related to Dominion’s 2007 consolidated earnings of $1.678 billion, surpassing a target of $1.625 billion, says Lazenby.

Farrell also earned $4.14 million in long-term incentive awards. Dominion stockholders enjoyed returns of nearly 17 percent last year, as the company outperformed the S&P by 13 percentage points.  Still, Farrell’s surge in pay comes against the looming prospect of higher energy rates. Dominion earlier this year asked state regulators to approve a fuel-rate increase that could increase customers’ monthly bills about 18 percent.

“Compensation was up in 2007 due to the performance of our broad platform of businesses in multiple states, but we had rate caps in 2007 in Virginia. Not a single penny of last year’s increases in [executive] compensation was reflected in Virginia Power rates,” says Lazenby. 

Figuring exactly how much money a CEO makes in a given year remains elusive. New securities laws enacted in 2006 were intended to clear up confusion, but lots of wrinkles still need to be ironed out. “Figuring out a CEO’s compensation should be clear and concise, but the problem is that the laws aren’t clear and concise,” says Federal.

Setting performance goals that are fair is another challenge, especially in the current economy, says Mercer’s Halloran. “They don’t want to be perceived as giving things away, but they also don’t want to drive away top executives.”

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