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Survey Estimates Values of Options, Excludes Exercises

Monday, August 16, 2004; Page E10

Figuring out how much executives get paid can be like predicting the weather -- an inexact science.

Is it fair to count a grant of restricted stock that extends over three years all in the year it was granted? How should stock options be valued when it's hard to predict what a company's stock will do over the next several years?


Fannie Mae Chairman Franklin D. Raines's 2003 options award has 10 more years to improve in value. (Brendan Smialowski -- Bloomberg News)

_____FANNIE MAE_____
(FNM) Stock Quote and News
Historical Chart
Company Description
Analyst Ratings
_____Host Marriott Corp_____
(HMT) Stock Quote and News
Historical Chart
Company Description
Analyst Ratings
_____Compensation Report_____
The Region's Highest-Paid Executives (The Washington Post, Aug 16, 2004)
Pay for XM Executives Modest as Stock Recovered (The Washington Post, Aug 16, 2004)
Lucrative Cash Package Came as Fairchild Reported $53.2 Million Loss (The Washington Post, Aug 16, 2004)
Board Members, Executives and Family Members Can Still Benefit (The Washington Post, Aug 16, 2004)
Expense Issue Draws Mixed Views From Companies (The Washington Post, Aug 16, 2004)
_____Charts_____
Top Compensation Packages
Top Salaries
Superlatives
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Telecommunications
_____Special Report_____
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_____Industries_____
Aerospace
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Information Technology
Telecommunications
_____Live Discussion_____
Monday, 3 p.m. ET: Washington Post staff writer David Hilzenrath and editor Mike Flagg will be online to discuss the 2004 executive compensation survey.
_____Local Executive Pay_____
Chart of Highest Paid Executives
Chart of Cash Compensation
How Washington's Corporate Elite Stacks Up (The Washington Post, Jul 16, 2001)
Compensation Glossary
The Methodology
Stock Options No Longer Guaranteed Windfalls for CEOs (The Washington Post, Jul 16, 2001)
CEOs Do All Right, But for Real Money Look to the Stars (The Washington Post, Jul 16, 2001)
Tech Exec Compensation Climbs (Washington Techway, 7/16/01)
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For purposes of uniformity between companies and continuity from year to year, The Washington Post has traditionally chosen the same way of doing these things. It values options by assuming a 5 percent appreciation compounded annually, but not including dividends, over the life of the option. That is one of several ways the Securities and Exchange Commission permits companies to report option values, although many executives would argue whether it is the most accurate.

Many would prefer the more conservative Black-Scholes model, which perhaps not coincidentally usually makes their option values look smaller.

This method considers factors like the volatility of a company's stock and its historical returns. The problem, particularly when comparing the value of one company's option grants with another, is that companies use different assumptions in their Black-Scholes models. Since The Post isn't privy to those assumptions, it uses the simpler 5 percent valuation.

Options, of course, are only valuable if the stock rises above the option's strike price -- the price at which executives can buy. At mortgage giant Fannie Mae, for example, the options Chairman Franklin D. Raines got last year were worth $6.6 million based on a 5 percent appreciation over the 10-year lives of the options. But with Fannie Mae stock trading around $70 a share last week, Raines's options, which have a strike price of $78.31, were under water. If they expired today, they would be worthless. But they don't expire until 2014, so it is possible the 135,000 options Raines got last year will be worth a great deal. That's why they show up in The Post's estimate of his compensation.

Or consider Christopher J. Nassetta, president and chief executive of Host Marriott Corp., a real estate investment trust that owns more than 100 hotels. Nassetta got a restricted stock award of $9.4 million last year, but it pays out over three years. Although the company contends it's an inaccurate way to do it, the SEC -- and The Post -- count the total value in 2003.

For this survey, every local company that files executive-pay information with the SEC was included. The top executives at each of those 165 companies were included regardless of their compensation. In all, 276 executives topped the $1 million mark out of 726 in total.

The Post classified the components of total compensation into five categories: salary, bonus, other long-term compensation, the potential value of option grants and all other compensation.

Salary and bonus are, of course, cash payments.

"Other long-term compensation" includes two types of compensation that reward an executive for achieving long-term performance goals. They are, typically, restricted stock awards -- company stock that an executive is not allowed to sell for a specified period -- and long-term incentive plan payouts, which are cash compensation tied to the company's achievement of long-term goals for revenue, profits or other measures.

Options that an executive exercised in the year were not included in total compensation. Also not included were "reload" options -- those granted as part of exercises of options granted in previous years.

"All other compensation" is a grab bag that includes things like reimbursement of relocation expenses, payment of life-insurance premiums or country-club memberships, use of a company car, corporate contributions to an executive's savings plan and reimbursement of taxes -- anything the company pays for.

Finally, all remuneration awarded during the year, even if it was compensation for years past or will be paid in years ahead, was included in this year's total compensation, as is required by the SEC.

Each company with an executive on the list was given the opportunity to review the information before publication.

Washington Business Editor Michael Flagg compiled the lists with help from Business section administrator Andrea Caumont and researcher Richard Drezen. The Post's Ed Holzinger and Jacqueline Dupree provided technical assistance. The Corporate Library assisted in helping calculate option values.

The compensation information comes from the companies' most recent proxy statements and annual reports filed with the SEC. Because fiscal years differ, in a few cases the information is more than a year old.


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