Paid to perform
CEO bonuses soared 17 percent in 2013
In 2013, the chief executives at Virginia’s largest publicly traded companies continued to see their total compensation closely scrutinized and tied to corporate financial benchmarks. For the second consecutive year, performance-based stock awards accounted for an increased component of overall pay, while cash bonuses rebounded in line with a robust stock market, according to an annual study by Equilar Inc., an executive compensation firm based in Redwood City, Calif.
And for the first time since Virginia Business began its annual look at CEO pay nearly 20 years ago, a woman chief executive claims the top spot: 56-year-old Phebe N. Novakovic, CEO and chairman at General Dynamics Corp., received total compensation of $18.77 million after taking the helm at the defense contractor last year. (Total compensation includes the combined value of salary, cash bonuses, stock awards, long-term awards and other incentives). Novakovic joined General Dynamics in 2001 following a long career in the U.S. intelligence communities, which included stints with U.S. Department of Defense and CIA. Before becoming CEO, she was the company’s president and chief operating officer. She earned a $1.5 million salary, a $4 million bonus and equity awards of nearly $13 million.
Virginia’s top execs saw their average compensation in 2013 increase nearly 6 percent from the previous year to $7.59 million. Illustrating the rising influence of performance-based measures, CEOs here received stock options valued at an average of $4.6 million last year, or 61 percent of the total median compensation.
Virginia Business commissioned Equilar to analyze CEO compensation at 37 public companies in the commonwealth with at least $1 billion in annual revenue. For comparison, Equilar analyzed total compensation between 2012 and 2013 for CEOs who had served at least two consecutive fiscal years. If a CEO was not in place in 2012, for example, compensation for 2013 was not factored into the current year’s group average.
According to Equilar, the base salary of Virginia CEOs increased 4 percent to an average of $974,238. Bonuses, meanwhile, soared nearly 17 percent to an average cash payout of $1.46 million, suggesting that CEOs were able to pilot their companies to short-term performance goals tied to net income, despite more rigorous regulatory oversight. That’s in stark contrast to 2012, when Virginia CEOs saw cash bonuses decline sharply.
The compensation gains in Virginia and across the U.S. came amid implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress in 2010. Companies have responded by restructuring pay packages to provide greater transparency on how they financially reward their chiefs, says Aaron Boyd, director of governance research at Equilar.
“Companies have shifted more pay to equity, and more of that equity is tied to performance shares. When a company misses targets, and its stock price falls, CEO pay tends to go down. As the economy continues to grow as it has the last three or four years — especially in terms of the broader stock market — it impacts returns and leads to CEO pay packages going up. That is a big driver of the trend we’re seeing in Virginia,” Boyd says.
The boom in stock prices has not trickled down to rank-and-file workers, at least not in the same proportion as executives. An August study by WorldatWork, a Washington, D.C., trade group, pegged pay raises for U.S. workers at 3 percent in 2014, up slightly from 2.9 percent in 2013.
In its research for Virginia Business, Equilar found that 16 of 37 CEOs received an annual bump in salary, while base pay remained the same year over year for nine execs. Two CEOs took a slight salary cut: Alpha Natural Resources Inc.’s Kevin Crutchfield (2 percent) and George Pedersen at ManTech International (5 percent). Another CEO, Richard D. Fairbank at Capital One Financial Corp., customarily does not take a salary, preferring to receive most of his pay in the form of stock options.
Ten CEOs had not completed two fiscal years as head of a public company and hence no year-to-year comparative data was available. In fact, this year’s list contains an anomaly. In terms of total compensation, two of the top three highest-paid CEOs and four of the top 10 had not served two full years. They include General Dynamics’ Novakovic, Martin J. Barrington at Altria Group ($17.5 million), Genworth Financial Corp. head Thomas J. McInerney ($11.9 million) and Kenneth Asbury at CACI International ($16.5 million).
Several newcomers dot this year’s list, including Hilton Worldwide Holdings Inc. CEO Christopher J. Nassetta, 51. Hilton went public in December with an initial public stock offering that netted an eye-popping $2.3 billion in proceeds. Three other CEOs made the list for the first time as their companies cracked $1 billion in annual revenue: Robert M. Lynch of Toano-based Lumber Liquidators Holdings, Phillip G. Norton of Herndon-based IT firm ePlus Inc., and Richard A. Montoni of government services contractor Maximus Inc. in Reston.
CEO John Jumper is not new to the list, but he’s with a different company this time around. After serving as head of Science Applications International Corp. since 2012, Jumper moved into the same role with Leidos Holdings Inc., an engineering company created when SAIC was split into two parts in September 2013.
Among CEOs with at least two years’ longevity, Fairbank at McLean-based Capital One leads the way with a combined package of $18.29 million, including $15.3 million in equity awards. That heady pay actually represents a one-year decline of 19 percent from $22 million. The 63-year-old Fairbank presided over the acquisition last year of Beech Street Capital, an originator of federal multifamily home mortgages with a loan portfolio approaching $10 billion.
Beginning in 1997, Fairbank opted to forgo an annual salary in lieu of Capital One stock. In addition to stock awards, Capital One directors in 2013 approved a $2.84 million bonus for Fairbank — the second straight year he received a cash award. In 2012, he got $2.19 million.
Close on Fairbank’s heels was Wesley G. Bush, 53, the chairman, CEO and president of defense contractor Northrop Grumman Corp. in Falls Church, with cumulative pay valued at $14.28 million, down 8 percent. More than half Bush’s compensation —$8 million — is tied up in equity. Bush’s $1.5 million salary in 2013 remained flat and his $3.2 million bonus fell 21 percent, for combined salary and bonus of $4.7 million.
Michael Lawrie, head of Computer Science Corp. (CSC), fell to third-highest-paid among CEOs with two years on the job (he was runner-up to Fairbank last year), securing a pay deal worth $13.3 million. Lawrie was brought in two years ago to right CSC’s listing fortunes, which had seen it diversify into noncore areas that drained revenue. Executing a strategy to divest nonperforming assets, Lawrie has helped engineer a turnaround that pushed CSC’s market capitalization to $8.6 billion through August. The 61-year-old Lawrie received a combined salary and bonus of $3.4 million, augmented by vesting-based performance shares with a grant-date value of $9.5 million.
On the strength of $8.6 million in equity awards, AvalonBay Communities Inc. CEO Timothy J. Naughton, 52, saw his overall compensation skyrocket 197 percent. Naughton, who has occupied the top spot at AvalonBay since 2012, received $2.58 million in combined salary and bonus money for guiding the Arlington-based apartment developer to post annualized revenue of $1.4 billion in fiscal year 2013. All told, Naughton was awarded a pay package last year exceeding $11.4 million.
Rounding out the top five is Dominion Resources Inc. chieftain Thomas F. Farrell II at $10.9 million, a one-year spike of 33 percent. Farrell’s pay encompassed a salary and bonus topping $3 million, equity awards of $4.2 million and long-term cash awards of $3.46 million.
Equilar’s Boyd says the intense focus on bottom-line results and executive pay is finally beginning to show up in companies’ balance sheets, noting that Virginia companies grew total shareholder returns by an average of 43 percent. It may not be a perfect barometer for gauging how much a CEO deserves, “but it is a strong indicator” of what compensation committees will look at in the future.