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2005 Compensation For Top-Earning Executives Grew With Stock Option Awards

Cash Kings

First in cash compensation in 2005 was William L. Walton of Allied Capital Corp., with $5.8 million in salary and bonus. (See accompanying story.) He was followed by two Sprint Nextel executives: Timothy M. Donohue with $5.6 million and Gary D. Forsee with $4.7 million.

After the merger of Sprint and Nextel last year, Forsee, the former Sprint chief executive, became chief executive of the combined firm, while Donohue, the former Nextel chief executive, became chairman. Donahue's pay included a special $2,250,000 award, which the company variously described as being "for work performed in connection with our merger" or as a "retention payment" determined "prior to our merger."

Emanuel J. Friedman and Eric F. Billings of Friedman, Billings, Ramsey Group Inc., who tied for first in total cash in 2004 with $9.8 million each, plummeted in 2005. During a money-losing year for the Arlington-based investment firm, Billings ranked 304th in cash with $480,000, having traded his traditional cash bonus for restricted stock, and Friedman left the firm during regulatory investigations.

Opting for Options

Generally, option grants ballooned for the executives at the top of the chart and deflated for the rest.

A defining feature of the tech bubble of the late 1990s, options have been criticized as rewarding executives for any increase in their company's stock price, even if it lagged market averages. Some policymakers argued that options encouraged executives to inflate earnings. From an accounting standpoint, options appeared to be something of a free lunch, because companies were not required to count them as an expense against earnings when they were awarded.

Defenders of stock options said they provide important incentives and predicted they would dwindle if the accounting rulemakers required that awards be counted against quarterly profits.

A new rule requiring that options be expensed began taking effect for some companies in the second half of last year. For the 100 most highly paid executives in the Post's study, the median option grant increased in value by 25 percent. At a median value of $3.1 million, option grants accounted for about half of the median pay package in that group.

For the next 600 executives in the survey, the median option grant declined in value by 60.6 percent to $24,904.

VSE Corp., for example, stopped issuing options to avoid having to count them against earnings. Telos Corp. issued no new options to top executives in 2005 because the company failed to meet financial performance triggers.

After receiving a $6.6 million option grant in 2004, which had not vested, Cogent Communications Group Inc. chairman, founder and chief executive Dave Schaeffer said he did not need more options to stay motivated. Schaeffer did receive $985,000 in restricted stock, a different form of award.

Some options, like those awarded to Sallie Mae's new chief executive, came with performance-based conditions. Sallie Mae's Fitzpatrick can't cash in any of the new options until May 2008, and before he can exercise them the company's stock price must meet targets ranging from an increase of at least 25 percent for some of the options to 50 percent for others.

But other options vest automatically over time, like those awarded to Fairbank of Capital One, or immediately, like those awarded to Rothblatt of United Therapeutics.

Compensation analysts had predicted a shift from option grants to awards of restricted stock-- shares that are given to the executive but that can't be liquidated until time passes or performance targets are met -- and there were signs of that in the survey. However, the survey also suggested that some executives are getting more restricted stock in addition to options rather than in place of them.

Forsee, the Sprint Nextel chief executive, received $13.7 million in restricted stock that vests after three years, up from $7.2 million in 2004, and also received 885,000 stock options, up from 779,400 in 2004.

For the 100 most highly paid executives, there was a 34 percent increase last year in median long-term compensation, a category on SEC disclosure forms that often includes restricted stock. Unlike options, restricted stock ordinarily has value even if the share price declines.

The one category of pay that declined last year for the 100 most highly compensated executives was also the smallest. "Other compensation" was down 60.4 percent, to $32,621.

That grab-bag category can include perks such as company cars and personal use of the company jet. But it's hard to determine how much those numbers have changed, because companies are not required to disclose the value of perks unless it exceeds a substantial threshold.

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