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Who Got What in a Slowing Economy
Financial Industry's Leaders Among Best Paid in Region

By Thomas Heath
Washington Post Staff Writer
Monday, July 28, 2008

Washington's growing financial sector was one of the first to feel the effects of the year-long slide that grew out of the mortgage mess. Although most financial firms saw their stocks wither, the industry's top executives continue to be among the best paid in the region, according to a Washington Post survey of large public companies.

Leaders at Freddie Mac, Fannie Mae, Capital One Financial, Allied Capital and American Capital each earned more than $10 million in 2007, according to the survey.

Several companies said the pay reflects their executives' efforts to navigate a difficult economic environment. Local executives have kept their companies afloat by containing the subprime mortgage crisis, hiring talented people, reorganizing businesses and generally running the enterprises, according to various proxy reports, spokesmen and interviews with human resource specialists.

Nevertheless, executive pay is a hot topic as the credit crisis continues to simmer. In the case of Freddie Mac and Fannie Mae, for instance, Congress just approved legislation to create a new regulator with the power to set compensation at the two government-sponsored enterprises.

Rep. Sam Johnson (R-Tex.), speaking on the floor of the House last Wednesday, criticized the pay packages at Fannie Mae and Freddie Mac.

"Why should taxpayers foot the bill to prop up those former giants when the company CEOs rake in a bundle and continue to do so?" Johnson said. "It's privatized profits and socialized risk. . . . Everyone knows I'm a strong supporter of freedom and free enterprise, but this is ridiculous. The lack of accountability and responsibility is astounding."

Fannie Mae and Freddie Mac representatives said their boards of directors put the brakes on certain parts of compensation packages in 2007 in recognition of the companies' struggles.

Experts note that an overall compensation package for any given year does not mean an executive will receive the money that year, or maybe ever. Stocks and bonuses can be spread over several years and sometimes not even materialize if an executive doesn't meet certain goals. On the other hand, compensation such as stock options or stock awards can grow to an amount far exceeding the size at which they were granted.

On average, the 100 highest-paid executives received $6.6 million, according to The Post examination. Data were provided by Equilar, an executive compensation research firm in Redwood Shores, Calif. The big factor in getting on the top-100 list was bonuses. Ninety-eight percent of the executives on the list received a bonus averaging $1.47 million. Seventy-nine percent received a direct stock award, with an average award of $2.7 million. Stock-option grants were given to 72 percent of the executives at an average value of $2.3 million.

At Fannie Mae and Freddie Mac last year, as at many other companies across the region and the country, the risky stock option was out. Stock awards and bonuses were in.

Richard F. Syron, chairman of Freddie Mac, earned $14.5 million in 2007, including a $2.2 million performance bonus. A company spokesman said the $2.2 million was only 66 percent of his targeted bonus of $3.34 million, showing that the board of directors held Syron accountable for the rough sledding at Freddie Mac. Freddie Mac's stock dropped by about half in 2007, destroying billions in shareholder value.

Even though he didn't receive all of the bonus he could have, Syron was paid another $1.25 million bonus in November when he agreed to stay an extra year and allow the board time to choose his successor. The company had offered the top job to Chief Operating Officer Eugene M. McQuade, who turned it down.

A Freddie Mac representative justified Syron's compensation, which also included an $8.3 million stock award, in an e-mail, citing improved customer service, his leadership in the subprime crisis and his role in stabilizing the mortgage markets. Given the decline in the Freddie Mac share price since the stock award was made, the $8.3 million is now worth on paper approximately $1.46 million, based on a reading of the company's proxy.

Daniel H. Mudd, Fannie Mae president and chief executive, saw his pay drop 15 percent last year, according to the company's proxy. Still, Mudd received $14.2 million in 2007, including a $10 million direct stock award. The drop in the Fannie Mae share price has resulted in a paper loss of nearly 66 percent of Mudd's $10 million award. His salary last year was $986,923 and he received $2.2 million in cash from a long-term incentive plan. The board of directors in 2007 eliminated executive perks such as private jets for personal use, financial services advice and a personal driver.

Malon Wilkus, chairman, president and chief executive of American Capital in Bethesda, earned $21.9 million last year including $6.2 million in salary, bonus and incentive pay. American Capital, a business development corporation that essentially operates as a publicly traded private-equity firm, broke into the Standard & Poor's 500-stock index last year. The company's stock did not do well, however, losing 28 percent of its value in 2007. American Capital paid out $655 million in dividends last year, a 44 percent increase over 2006.

Allied Capital of the District, a financial firm similar to American Capital, paid William L. Walton, its chairman, president and chief executive, $11 million last year including a $1.5 million salary and a $5.3 million bonus. Allied Capital stock had a difficult year, losing about a third of its value during 2007. According to Allied Capital's proxy, Walton earned his compensation by achieving "numerous strategic investment and operational goals and objectives," including paying out $407 million in dividends (an increase of 14 percent over 2006), investing $1.8 billion and generating $268.5 million in net realized capital gains, among other things.

In accordance with certain tax advantages, American Capital and Allied Capital are both required to pay out a high percentage of their income in dividends.

Compensation experts say 2008 will be a crucial year for the shareholder revolution that was supposed to bring greater transparency and accountability to executive compensation. Although finance companies bore the brunt of the economic downturn so far, the twin ills of inflation and slow growth are spreading across other industries.

"This year, 2008, is really where we are going to find out whether the rubber meets the road as far as pay for performance," said Patrick McGurn, special counsel at RiskMetrics Group, which advises institutional investors on corporate governance. "By any stretch of the imagination, this is going to be a significantly down year for performance for every sector of the economy. The question is whether the boards of directors are going to keep faith with shareholders or return to the practices of the past, including lowering the performance bar so executives can clear it more easily."

Although Washington's growing financial sector dominated corporate payouts, many executives across the region appeared to do very well -- with or without bonuses.

The biggest winners were executives at Lockheed Martin. Robert J. Stevens, the Bethesda defense contractor's chairman, president and chief executive, earned $26 million last year, of which $14 million was in cash payments from salary, bonus and incentive plans.

"Since 2005, our stock has increased 65 percent and since 2003, it has increased 105 percent," Jeffery Adams, a Lockheed spokesman, wrote in an e-mail. "For the three-year period 2005-2007, our market capitalization increased by $19 billion . . . if our named executive officers keep producing superior results, they will continue to be highly paid."

The six highest-earning Lockheed executives were paid a total of $52.8 million last year. That is equal to about 8 percent of the $615 million in gross dividends that Lockheed paid to its shareholders in 2007. The $52.8 million also represents 1 percent of the $5 billion that Lockheed Martin generated for its shareholders last year in dividends and capital appreciation, according to the company.

Martine A. Rothblatt, founder and chief executive of United Therapeutics and the second-most highly compensated leader of a public company in the Washington region, had a 2007 compensation package that was close to a conventional stock-option reward.

Rothblatt last year doubled the price of United Therapeutics stock, a Silver Spring company she founded to pursue a cure for pulmonary arterial hypertension, a disease that afflicts her daughter. In accordance with her employment agreement, the company awarded her options equal to one-18th of 1 percent of the growth of the stock during 2007. Her 582,607 options were granted last December and they vested immediately, giving her an option to purchase the company's common stock.

Rothblatt's 2007 stock options were valued on United Therapeutics' books at the end of the year at $23.7 million, but if she sold them today they would be worth $3.5 million.

Rothblatt's package differs from some stock option packages, which tend to vest in stages over a period of years. Rothblatt doesn't get option awards if the stock doesn't grow that year.

"The take-home message for the way we compensate our chief executive officer is that our compensation committee tried to align that compensation as nearly as possible with the interest of our shareholders," said Andy Fisher, United Therapeutics senior vice president.

A perennial figure on The Washington Post's survey is Richard Fairbank, founder, chairman and chief executive of Capital One Financial, the McLean credit card company that has been hard hit by the subprime mortgage crisis. Fairbank typically takes his entire compensation in the form of stock options, then waits years for them to vest. Even after the options vest, Fairbank generally holds onto the shares as a sign of his confidence in the company.

Last year appears to be no exception. Capital One paid Fairbank $17 million in options although the company's stock was one of the worst performers in the region, declining 40 percent in 2007.

Despite the stock decline, the company's proxy statement said several factors helped determine Fairbank's pay, including his execution of corporate strategy, reorganizing business lines and recruiting talent.

The options will have value only if Fairbank grows the stock.

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