Among most highly paid CEOs, the value is in long-term incentives

By Danielle Douglas
Monday, October 25, 2010; 16

Robert S. Silberman, the chairman and chief executive of Arlington-based Strayer Education, was the highest paid CEO among the region's largest public companies last year with total compensation of $41.9 million, according to an analysis of data filed with the Securities and Exchange Commission.

That's quite a change for Silberman, who has not even cracked the top 10 list in the past. All it took in 2009, however, was one hefty $40 million stock award that, in all fairness, may or may not be worth that much when it actually vests 10 years from now. The for-profit university is dangling the carrot before Silberman, who must achieve a set of performance goals within the next decade to grab hold. Without the award, the chief's compensation package would rank in the bottom half of the region's top 100 highest-paid executives.

Measurements such as stock and option awards, bonuses, salary, incentive plan payouts and all other perks are key to understanding how companies value their leaders. But there are many ways to look at the numbers.

Companies such as Strayer argue that the inclusion of restricted stock in the SEC's annual compensation table based on its grant date distorts what their CEO actually took home last year.

"Because the grant is for a 10-year period, it is recognized as $4 million of compensation expense each year," said David Wargo, the former chairman of Strayer's compensation committee, in a statement to Capital Business. "Annual cash compensation for Mr. Silberman is mostly tied to key performance parameters that measure ... academic quality, regulatory standing and financial performance."

When the committee handed down its award early last year, Strayer was riding a revenue high, eventually closing out 2009 with $512 million in revenue, a 29 percent jump from the prior year. The trend continued in the first six months of this year, with the company recording a 27 percent surge in year-over-year revenue.

That stellar performance has been overshadowed of late by a report from the Education Department showing that only 25 percent of Strayer's former students were repaying their loans. The company claimed its own calculations registered a repayment rate of at least 55 percent. But news of the findings, and the Education Department's consideration of regulations to address the issue industrywide, sent shares plummeting 18.4 percent, or $36.75, to $163.26 on the day the report was issued.

Wargo noted that the value of Strayer's equity has climbed 860 percent from the time Silberman took the helm in 2000 to when the grant was awarded in 2009.

The structure of Silberman's pay package reflects a larger trend of public companies placing greater emphasis on long-term incentives -- meant to reward sustained performance that creates shareholder value. The prevalence of these plans among the country's top public companies has grown from 18 percent in 2003 to 35 percent in 2009, according to research firm Hewitt Associates.

Charlie Tharp, executive vice president for policy at the Center on Executive Compensation, said during the height of the downturn "it was difficult for companies to really set amiable long-term incentive objectives because the economy was so uncertain, but we're seeing a little more confidence coming back in goal setting." He also noted a slight resurgence in the use of stock options, which has been on the decline in the past two years as companies shifted to performance-based plans.

For some, the value of stock awards may be going up, said Aaron Boyd, an analyst at Equilar, the executive compensation research firm that compiled and analyzed the pay data for Capital Business. "Companies granted these awards in the first three months of the year, at the low point of the market," he said. "But when you take into consideration the stock growth since that time, a lot of the numbers will end up being even bigger than what they currently show."

A number of the executives who landed in the top 10 received a large share of their compensation in equity. Take United Therapeutics' Martine A. Rothblatt, who, in fifth place, received $14.5 million of her total $15.8 million pay in stock and option awards. Nearly 75 percent of the total compensation for Northrop Grumman's now-former chief, Ronald D. Sugar, was made up of comprised of equity awards. Sugar, who retired at the end of last year, ranked third on the list with reported pay of $17.9 million.

Defense contractors -- with second place Robert J. Stevens of Lockheed Martin at $20.4 million, sixth place Jay L. Johnson of General Dynamics at $12.7 million and eighth place H. Lawrence Culp Jr. of Danaher at $11 million -- dominated the top ranks.

The industry continued to post profits throughout the downturn. More recently, stocks were rankled by Defense Secretary Robert M. Gates' decision to curtail defense spending by $100 billion over five years. Some contractors, such as Lockheed, are already starting to reduce spending, with divestitures and executive buyouts. The company froze the salaries of its top executives last year, but what the defense cuts will mean for executive compensation in the coming year is unclear.

Public scrutiny of pay packages has given pause to companies that were once rather generous with the use of corporate jets and the like, Tharp said. Perks were far less prevalent last year, as were gross-ups, in which companies pay such things as the exercise tax on retirement parachutes. The anticipation of added regulatory disclosure may have compelled some of these changes. "Companies are doing a much better job of telling shareholders their pay-for-performance story," Tharp said. "The Dodd-Frank bill requires disclosure of that, but I think the trend is already happening."

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