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Transcript

Executive Compensation

Top Executive Pay

David Hilzenrath and Mike Flagg
Washington Post Staff Writer and Editor
Monday, August 16, 2004; 3:00 PM

The Washington Post on Monday published its annual look at compensation levels of the region's top executives. It shows that pay for the Washington area's top executives rose significantly last year, reversing the downward trend that set in with the recession in 2001.

Washington Post staff writer David Hilzenrath and editor Mike Flagg, who compiled the compensation data, will be online Monday, Aug. 16, at 3 p.m. ET to discuss the package.

_____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)
Survey Estimates Values of Options, Excludes Exercises (The Washington Post, Aug 16, 2004)
_____Charts_____
Top Compensation Packages
Top Salaries
Superlatives
Trends
_____Industries_____
Aerospace
Biotechnology
Information Technology
Telecommunications
_____Live Discussion_____
Transcript: Washington Post staff writer David Hilzenrath and editor Mike Flagg were online to discuss the 2004 executive compensation survey.
_____Multimedia_____
Audio: Washington Post reporter David Hilzenrath discussed executive compensation on WTOP.

Submit your questions and comments before or during today's discussion.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Mike Flagg: Hi and welcome to the Washington Post's live online discussion of its annual survey of local executives' pay. With you to answer questions you might have on the package is reporter David Hilzenrath, author of the three main stories in today's Monday business section, and Mike Flagg, Washington business editor, who coordinated the research.

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Clifton, Va.: What's wrong with this picture? Three of the top 100 executives for total compensation are with US Airways Group. David Siegel CEO #19, Neal Cohen CFO #63, and Alan Crellin #100.

These guys brow beat the employees for wage cuts and these guys live high on the hog. How do they live with themselves. Our compensation for executives is totally out of line in this country.

washingtonpost.com: Compensation Report (Post, Aug. 16)

Mike Flagg: It's certainly true that US Air employees have a tough row to hoe these days. The argument companies usually make in these cases is that they have to pay these execs a lot of money to stay on and get the company out of the fix it's in, or that turnaround artists need more money because their skills are that much more in demand. Whether you buy that or not is a matter of debate, I suppose.

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Linden, N.J.: Dear Mr. Hilzenrath and Flagg, I feel executives are often excessively compensated and their justification for this is that they bring expertise to the company and increase the value of the company's stock. However, wouldn't the earnings to the shareholders be more if the executives were paid less and the amount saved would be paid out to shareholders? I'd appreciate your views on this. Thanks!!!

David Hilzenrath: I have a simple answer and a complicated non-answer to your question.

First, the complicated non-answer. How much do you think the executive contributes to the company's profits? How much less would the executive contribute if the company cut his or her pay by, say, 10, 15, or 50 percent? And how much would the company need to pay someone else to do a comparable job?

I can't answer those questions. I'm not even sure boards of directors routinely ask them when reviewing executive pay. Often, boards peg executive salaries to levels at other companies. Generally, they link bonuses to profitability, on the assumption that the company's financial performance relates directly to the executive's actions.

Now for the simple answer. From an accounting standpoint, executive compensation is generally an expense, and reducing expenses leaves a bigger profit or a smaller loss. Profits can be passed along to shareholders as dividends, and larger profits can lead to higher share prices.

However, every dollar saved on executive pay would not necessarily translate into a dollar gained for shareholders. Like other business expenses, executive compensation is generally tax deductible, so taxpayers in effect subsidize it.

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Fairfax County, Virginia: Re the quote from Professor Bebchuck, which seems to me to be the core point of your series of articles, why have all of the post-Enron reforms failed to address this key issue? What more is necessary?

David Hilzenrath: You're referring to Prof. Bebchuck's comment that "there has been far too little change in the compensation landscape."

Neither Congress nor the regulators set out to dictate executive pay. In the aftermath of Enron, the major stock exchanges gave added responsibility to independent directors, requiring that executive compensation be addressed by board members free of significant conflicts of interest.

So far, the major policy battle has focused on stock options. It remains to be seen whether companies will be required to account for stock option grants as expenses. If so, options are likely to become less popular.

Critics say options have encouraged accounting manipulations and other counter-productive efforts to boost stock prices. Defenders say they create and spread wealth and inspire hard work. Defenders have shown that they have great influence with Congress.

Some changes are already taking place -- individual companies voluntarily expensing options or giving them less weight.

Ultimately, changes in executive pay depend on corporate boards. If shareholders are unhappy with the actions of boards, they will have to muster the will and ability to influence boards. The reality is that, in the present system, shareholders have only limited ability to bring about revolutions in the board room.

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Washington, D.C.: In stories like the ones you wrote today, particularly the discussion of Steiner at Fairchild, why don't you print the names of the members of the compensation committees responsible for approving these pay packages? Aren't they the ones responsible?

washingtonpost.com: Lucrative Cash Package Came as Fairchild Reported $53.2 Million Loss (Post, Aug. 16)

David Hilzenrath: Good question.

In Fairchild's last proxy report, filed in October 2003, the report of the Compensation and Stock Option Committee was signed by Daniel Lebard (chairman), Harold J. Harris, and Herbert S. Richey.

Lebard, listed as 64, was described as chairman of the supervisory board of Daniel Lebard Management Development SA, a consulting firm in Paris. Lebard did not return a call to that firm.

Harris, listed as 74, was president of Wm. H. Haris, Inc., a retailer. He did not return calls seeking comment.

Richey, listed as 81, was described as president of Richey Coal Company, a coal properties brokerage and consulting firm. Richey declined to comment.

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Monterey, Calif.: Are there any CEO's, senior executives, or companies which acknowledge the relatively equal contribution that employees at all levels make and cap executive salaries accordingly?

If there are any such examples, do you know how/if they have benefited from that practice?

Mike Flagg: I haven't seen that sort of thing practices that much in the US. Japanese corporations try to minimize the gap between their execs and their lowest paid people, and in fact it is a much smaller gap than in the US. On the other hand, as we all know, there are lots of things we shouldn't emulate about the Japanese system. The notion of personally taking responsibility for big mistakes and holding down exec pay, though, do seem something American execs could learn from.

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Vienna, Va.: Among the highest paid CEOs that you interviewed. How many were women?

Mike Flagg: Of the top 100 highest paid executives in the Washington area, only two were women: Catherine West of Capital One and Marianne M. Keler of SLM. That's the same number as 2002, when only Joan M. Sweeney of Allied Capital and Marianne M. Keler made the list. Clearly it's still a man's world in Washington business, as it is almost everywhere else.

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Arlington, Va.: Would it be possible for you to also do statistics on compensation to the Administrative Aides of these OVERPAID CEOs?

I have watched female Admin Ad. literally run the businesses, making the important decisions and keeping rein on over 300 employees. The female Admin Ad was paid $54,000 a year. The boss made more than a million a year. She was far more valuable an employee for the company and stock holders than was the CEO.

Many CEOs now make decisions by "teams" so they won't be held accountable for any mistakes.

Mike Flagg: Companies are only required to publish in their proxies the pay of their top five officers. So it's not possible to know what their administrative aides make. But you can be sure it's a fraction of what their bosses make. Supposedly the company's board should weed out inept bosses, and I expect that happens more often than not. Where boards fall down more often, of course, is in compensation.

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Maryland: How many reporters and how long did it take to compile the report? Also, were many of the execs willing to talk or skeptical?

Mike Flagg: David Hilzenrath, a veteran of the business news section, was the main reporter on the project. We got some help from the Corporate Library evaluating options and I did much of the research with assistance from the extremely capable Post business section administrator Andrea Caumont. The entering of most of the numbers into our database is purely mechanical, and we hired part timers to do that. Where it gets tricky is valuing options, because you often have several tranches at different strike prices, different expirations and other complicated stuff.It is one of the Post's biggest standing projects every year, after the Post 200, which comes out in April.

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Arlington, Va.: Can you compare the use of stock options in the compensation packages of executives at tech companies versus more traditional firms?

Mike Flagg: We didn't specifically address this: our database doesn't allow us to make those kinds of distinctions. But it is interesting to note that one of the biggest grants went to an executive of a more or less typical manufacturing company -- Culp, CEO of Danaher -- and to the big financial institutions that so dominate much of the business and political landscape of Washington, SLM and Fannie Mae. We have seen some tech and biotech and other similar kinds of companies go bananas on options in the past, but the biggest payouts locally still seem to be the usual companies, Lockheed Martin, Nextel, Marriott. Of course, they are also the biggest companies in size, so it makes some sense they'd have hefty pay packages. As you may know, Fannie Mae is the biggest company by revenue in the area, followed by Lockheed, General Dynamics, Nextel and Capital One.

David Hilzenrath: Danaher's vast array of products include Sears Craftsman hand tools, dental X-ray machines, and systems used in aircraft ejector seats.

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Anonymous: How do the local execs compare to CEOs of other states such as New York city?

Mike Flagg: We didn't compare our CEOs specifically to another area, and even comparing our survey to broad national surveys is problematic. ONe of the most widely used, by the consulting firm Mercer, looks only at CEOs (we look at everybody who made the hit parade of top five highest paid officers in the proxy.) They look at over 300 corporations; we have about 165 here, and over 700 people listed. That being said, though, most everybody who does these things says options are tailing off and cash is going up. That's what Mercer said. Here in DC, we seem to still have a somewhat heavier reliance on options as a form of exec pay. Some of these guys -- 11 at seven companies last year -- got more than estimated $10 million last year, and 125 got more than $1 million. Is that because we're relatively tech heavy here, an industry where options are more common? Don't know. It's one of the questions we may follow up in future, or address in next year's study. But lots of surveys, including some by our newspaper competitors, seem to show the days of mega option grants may be receding, especially when the FASB requires companies as soon as next year to expense the things.

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Forestville, Md.: Why does executive compensation rise significantly in a period of high unemployment?

David Hilzenrath: It's not clear that unemployment even factors into the executive compensation equation.

Bonuses are generally tied to profits, and the median profit in our survey was up sharply.

In fact, the stock market often rewards companies for cutting expenses -- including payroll expenses.

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Washington, D.C.: Was there anything in this year's report that was new or surprising compared to last year's? Also, how does this differ from the Post 200?

Mike Flagg: What surprised me most was that pay hadn't quite reached the peak it hit it hit in 2000. Despite these handsome pay packages, we still haven't come back to the median pay the top 100 got four years ago. I wasn't around then, but the largesse certainly seems to have been big and broad back then. Of course, it was before the stock market and tech crashes, so you have to take that into consideration. Still, it does seem surprising to me. Total compensation back then -- our estimates of options, the restricted stock awards as well as cash -- were almost a million and a half dollars back then for the median. The way pay is going up lately, though, it shouldn't be long before local execs have surpassed that banner year.

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Anonymous: I don't think there's anything new to find that local execs get paid an incredible amount of money running their companies. Did many of them make a case of what they are doing that does not parallel the Enron and Martha scandals?

Mike Flagg: Well, we didn't have many admit to Ken Lay-type shenanigans. And I agree, it's not so surprising to learn lots of local execs make lots of money. What the Post tries to do is just give a report card of who's up and who's down, and why in local business. Kind of a reality check, if you will. We hope we achieved that.

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David Hilzenrath: Well, that's all we have time for today. Thank you for your questions, and please join us again next year for another edition of The Region's Highest-Paid Executives.

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