How the Compensation Rankings Are Compiled

The Washington Post's annual executive compensation survey covers top executives of local companies and is drawn from publicly available data filed with the Securities and Exchange Commission. This year's survey covered 708 executives at 157 firms.

The information compiled from the SEC reports was sent to the companies for confirmation of accuracy. Most, but not all, companies responded to the inquiries. Errors were corrected and other concerns were discussed with company representatives.

The survey classified total compensation into five categories: salary, bonus, the value of stock option grants, long-term compensation, and a grab-bag of "other" compensation that includes such perks as company cars or club memberships.

Salary and bonuses -- cash compensation -- are seldom disputed, and, with a few exceptions, are clearly recorded in company statements.

The value of stock options is a different matter. The SEC lets companies choose from a number of standards to measure such benefits. Further complicating matters, executives may be awarded options in one year but not cash them in for years ahead.

For purposes of uniformity between companies and continuity from year to year, the Post's survey includes the value of options in the year they are awarded, regardless of when they might be redeemed. It also assumes that the value of a company's shares appreciate 5 percent annually, which is one of the methods authorized by the SEC. Dividends are not included in that calculation.

For example, the highest-compensated executive in the area last year, Thomas J. Fitzpatrick, chief executive of SLM Corp. of Reston, was awarded 1 million options last year with an exercise price of $49.88 a share. That means he could purchase the shares for $49.88 million. Assuming that the share price grew 5 percent each year over the maximum 10-year life of the options, Fitzpatrick would benefit from a $31.4 million increase in the value of the shares.

Many companies prefer the alternative Black-Scholes model, which usually makes their options values look smaller. In fact, SLM, the student loan company known as Sallie Mae, used the Black-Scholes method in its SEC filing and valued Fitzpatrick's options at $9 million.

This method considers such factors as the volatility of a company's stock. The problem, particularly when comparing the value of one company's option grants with another's, is that companies use different assumptions in their Black-Scholes models.

Since The Post is not always privy to those assumptions, this survey uses the 5 percent valuation.

Of course, stock may appreciate more than 5 percent annually -- the SEC permits companies to assume 10 percent appreciation as well -- or it can fall in value. Options can be "underwater" -- meaning the price at which an executive can buy the stock is higher than the shares cost on the open market, making them worthless unless the prices rises. (In such cases, companies sometimes "re-price" previously granted options downward to make them profitable.)

Long-term compensation typically covers two types of awards for achieving long-term performance goals. Cash payments under long-term incentive plans are tied to the achievement of long-term goals for revenue, profit or other measures. Restricted stock awards are company stock that an executive is not allowed to sell for a specified period.

The value of restricted stock fluctuates with a company's stock price. For example, two executives and one former executive of WorldSpace Inc., an international satellite radio company that went public last year, made the list of the 100 highest-compensated executives. Those rankings are based on the value the company reported to the SEC for restricted stock that the executives cannot sell until January. As of now, the stock is worth far less than when it was awarded last year.

For example, Noah A. Samara, the company's chairman and chief executive, was awarded stock valued at $11.5 million in the company's SEC filing. As of Friday's close, the shares were worth $2.2 million.

"Other compensation" includes such items as 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.

The Washington Post Co. was included in the survey, but none of its executives made the top 100 list for cash or total compensation. The company's highest-compensated executive was John B. Morse Jr., vice president and chief financial officer, whose total compensation was $1.4 million, ranking him No. 225. Donald E. Graham, chairman and chief executive, had total compensation of $811,316 in 2005 -- $400,000 in salary, $400,000 awarded as part of a long-term incentive plan plus $11,316 in other compensation, most of that in the form of a company contribution to his 401(k) account. That ranked him No. 328 in total compensation.

Washington Business Editor Larry Liebert supervised the compensation survey. Data were collected by staff writer Terence O'Hara and Liebert and checked by business section administrator Andrea Caumont. Research database editor Derek Willis and staff writer Chris Kirkham contributed to the report. Section art director David Murray produced the informational graphics. The Post's Ed Holzinger and Jacqueline Dupree provided technical assistance.