Post reporters David Hilzenrath and Terence O'Hara were online to discuss The Post's survey of executive compensation at Washington-area companies.
The full report is online here. Also, check out O'Hara's lead piece, "Rich Rewards For the Region's Corporate Elite," and Hilzenrath's "For Many Top Executives, It's Ask and You Shall Receive."
The transcript is below:
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washingtonpost.com: David, Terry: Thanks for joining us today. Before we get started with readers' questions, please describe how you assembled the data for this compensation report. Were the companies forthcoming in disclosing executive compensation and perks?
David Hilzenrath: All the data The Post published came from reports filed with the Securities and Exchange Commission. These are public documents, and readers can find them online at the SEC Web site, under "Filings and Forms." Here's a link to the search page.
Companies with publicly traded securities are required to disclose information on executive compensation in annual reports to shareholders. Typically this information shows up in the so-called proxy report addressed to shareholders in advance of the annual shareholders meeting.
The Post asked companies to review the numbers for accuracy, and many companies cooperated with our fact-checking efforts.
For more on how the survey was done, see the "Behind the Numbers" explainer that ran with the package.
One company confirmed the pay data on its executives but asked that we omit them from our report. As an editor here wrote, "Well, no." The executives work for the shareholders, and the investing public is entitled to this information.
None of the executives contacted for the story on perks would grant an interview. Neither would the board members we tried to interview in their roles as heads of compensation committees overseeing executive pay.
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Washington, D.C.: Do you feel that reforming corporate governance to allow for more shareholder democracy (direct approval of executive pay, or non-Stalinist election of the board) is an effective way to reign in executive compensation? Or are more rigid and equalizing reforms needed across the board--say, a law stating that the highest-paid executive recieve no more than 25 times the salary of the lowest-paid employee?
David Hilzenrath: For the government to impose limits on executive pay would be a radical departure from our capitalist system.
In the early 1990s, the government tried to influence executive pay through the tax code, by limiting the deductibility of executive salaries. Some corporations were undeterred by the tax consequences, and others got around the limit by emphasizing other ostensibly performance-based forms of compensation.
There is a school of thought that says the investing public, or at least big investors, could make a difference if only they had a stronger voice in the boardroom.
There is another school of thought that says current pay levels reflect the market value of top executives.
Terence O'Hara: In Europe shareholders do have a more direct say in setting compensation of senior executive. I spoke to one corporate director, Richard Braddock, who sits on the board of a British public company. He told me he viewed this system of shareholder input (I'm not clear on exactly how shareholders provide this input in Britain) as undemocratic, giving as it does too much weight to the views of large shareholders in setting corporate policy over small, individual shareholders. In my opinion, elections for board seats should be more competitive, and shareholders should have a choice over two or more directors, including making it far easier for sharholders to nominate outside director candidates, instead of merely approving management's and existing directors' choices for new directors. Corporate America thinks this is an invitation to chaos at annual meetings. But if a director is genuinely concerned about how shareholders view his or her actions, instead of just worrying about the legal defensability of them, I think that would be of benefit, not just in setting corporate pay but in a variety of corporate governance endeavors.
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Earlysville, Va.: Many people think executives are over-compensated, mostly those of us who make a fraction of typical executive salaries and have a fraction of their retirement benefits. But this sentiment gives little or no insight into how executive salaries actually ought to be determined. In your view, what is the best logic for determining what an executive's salary ought to be? Should the same logic be applied to "rank and file" workers or does it make more sense to have a separate logic for each? Also, should we draw sharper distinctions between the logic of compensation and the logic governing retirement benefits? While one could certainly argue that an executive deserves greater compensation than the average worker while both are employed by a firm, it would seem that their contributions are roughly equal after their retirement (i.e., zero). Should executive retirement benefits be closer in line with the average worker? In some cases (i.e., Jack Welch of GE) it seems that retired executive perqs are even greater than those of current executives working for the company.
David Hilzenrath: There seems to be a general consensus that executives should be paid for performance. But there doesn't seem to be much consensus as to how that might be accomplished.
For example, stock options were once seen as a way to align executives' interests with those of shareholders. Now, many people believe that their all-upside, no downside design encouraged executives to cook the books and to gamble on misguided mergers and acquisitions. What's more, a rising tide lifted all boats: In a bull market, holders of options stood to benefit from any increase in the stock price, even if their stock was underperforming the market as a whole.
Now, restricted stock is gaining popularity as an alternative to options, but critics say it rewards executives whether the stock price goes up or down.
Beyond linking pay to performance, simply measuring performance is a challenge. How much credit or blame does any CEO deserve for changes in a company's earnings or stock price?
The issue of retirement pay is a bit clearer. Pension payments may be based on an executive's salary and bonus, which may reflect the board's assessment of the executives' past performance. But some corporate governance analysts are especially troubled by the increase in retirement pay and retirement perks, because they see these potentially huge benefits as fundamentally disconnected from an executive's performance while on the job.
What's more, the retirement pay may never show up clearly in the reports companies file with the SEC, because by the time the executive receives it, he or she probably has left the company and is no longer covered by the disclosure requirements.
Terence O'Hara: I have no problem offering an opinion on this one. I don't think any executive should be paid millions of dollars a year in retirement, a retirement that could last decades, in addition the perks and accoutrements of a CEO (including gratis use of a shareholder-owned plane), without adding a lick of value to the company. I don't see how that is justifiable. I'm sure there are plenty of compensation experts who disagree with me, arguing that pensions are a key to "attracting and retaining top talent." I would say: prove it.
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Mclean, Virginia: How come all these executives get pay so such high salaries and bonuses, but some of companies are laying off employees to reduce expenses.
Not even 20 employees together made the millions that these executives are making.
Shame on them.
David Hilzenrath: A similar question was raised a year ago when we published our last annual survey.
Do you have any specific examples in mind?
As a general matter, I can only point out that, as your question recognizes, laying off employees can reduce expenses and improve profits. It can also boost the stock price. Investors often view layoffs as leading to greater efficiency.
Thus, if executive pay is linked to financial or stock performance, laying off employees can actually enhance executive pay.
Terence O'Hara: In a number of arenas, not just corporations, a star system has developed where inflation simply takes hold. Sports stars, hospital executives, movie stars, non-profit managers, you name it: the people deemed to be the most valuable to an organization are increasingly paid huge salaries and bonuses relative to all members of the enterprise.
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Washington, D.C.: Where did The Post Co.'s top execs fall on this list?
David Hilzenrath: Here's an excerpt from the explainer that accompanied the charts:
"The Washington Post Co. was included in the survey, but none of its executives made the top 100 lists for cash or total compensation. Donald E. Graham, chairman and chief executive, was paid $410,918 in 2004 -- $400,000 in salary plus $10,918 in other compensation, most of that in the form of a company contribution to his 401(k) account."
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Washington, D.C: The outline of the executive pay was dissappointing yesterday. What do specialized duties do executives perform that is so different or difficult than regular employees or managers that they warrant such outrageous salaries, stock, bonuses and other lucrative incentives? Isn't this situation affirming Karl Marx's theory of workers vs. managers and the surplus value issue? Don't employees desire a share of the surplus value or incentives given to executives considering that employees such as me are the ones out there doing the sales or coming up with ideas for application systems, etc? Where is our take?
David Hilzenrath: I'll stay out of the political and philosophical debate.
But, approaching the issue objectively, wouldn't it be interesting to conduct a controlled experiment? Substitute random employees or middle-managers for the CEO, and see what difference it makes?
What do you think we would learn?
Terence O'Hara: I would say to any employee who thinks he's getting the short end, quit and go someplace else where you think you can get rewarded more equitably; or, start your own company. Ditto for shareholders: Sell the stock and buy a company who's executive pay coincides with increases in shareholder value. We can be vexed at rising CEO pay, but we don't have to be sheep.
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Baltimore: From an accounting perspective, why is it so important for companies to disclose the costs of operating their corporate jets?
Terence O'Hara: Imagine you're a homeowner and you've hired a contractor to perform a large renovation on your house. You ask for a breakdown of costs. One line item is "transportation costs" and it amounts to about 10 percent of the total cost of the job. Let's say $10,000 of $100,00. But suppose half of those $10,000 in transportation costs were to cover the contractor's use of the company van to take three trips to Las Vegas for him and his family, and a fishing trip to Wyoming for him and his buddies. Would you want that accounted for?
David Hilzenrath: Just to be absolutely clear about this, our story was about executives using the corporate jet for personal trips. This privilege has become one of most coveted and costliest corporate perks, and if it isn't fully disclosed, it can be a form of hidden compensation.
Some companies spend hundreds of thousands of dollars subsidizing their CEO's personal flights.
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Silver Spring, Md.: Does the granting of restricted stock dilute the value of total shares?
Terence O'Hara: By definition, yes, it does. It is the gift of shares to one or just a few shareholders, which increases the shares outstanding, thus diluting the voting and equity interests of all other shareholders that didn't get the restricted stock.
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Washington, DC: I wonder how many Washington area top executives received no compensation because of a drop in stock price. Are there starving CEOs out there?
Terence O'Hara: The only chief executive who received no salary and bonus is Richard Fairbank, of credit card company Capital One Financial Group. Nearly all of his compensation is in the form of stock options. But don't cry for him: he cashed in previously granted options that netted him more than $50 million last year.
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Washington, D.C.: I don't understand how options can be considered part of total compensation if they haven't been optioned yet. If I understand it, the execs are NOT required to exercise their options ever, right?
Terence O'Hara: No, they are not. The key to understanding options as a part of overall compensation is the EXPECTATION that they will increase in value. Otherwise, why would a board of directors grant them? Further, these options have a cost, under widely promulgated accounting, tax and economic theories. If they have a cost, why not include them in total compensation?
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Bethesda, Md.: It's said that CEO pay reflects a fair market. But as corporate boards are increasingly filled by other high-paid execs, don't we end up in a vast feeding frenzy fueled by peer pressure and feelings of entitlement?
David Hilzenrath: When boards set executive pay, they generally consult consultants who provide all sorts of data on how much executives at other companies are being paid. Indirectly, there's a certain circularity to the process. An executive from Company A sitting on the board of Company B may have his own pay set in comparison with that of the CEO of Company B -- and companies C through Z.
But that may be a tenuous connection. The cultural connection you mentioned is probably more powerful. When CEOs set each other's pay, they may bring similar sensibilities to the task.
Do peer pressure and feelings of entitlement help shape pay packages? People who have been in the boardroom raise those themes, echoing the sentiments of outside critics we interviewed.
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Boston, MA: How did you tabulate the pay accruing from rabbi trusts, accelerated pension vesting and below-market premiums from life insurance?
Terence O'Hara: If a company included these benefits in other compensation, we included it in our totals. We relied on the company's own accounting in such instances (though I can't recall any rabbi trusts coming up in our research of local companies).
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Washington, DC: Maybe I've missed this: does the Post conduct a survey of non-profit executive compensation, as well?
Terence O'Hara: No, but I think we should.
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Washington, D.C.: How do you view the role of the institutional investor as it is related to this issue? Many of us own merely fractions of shares through mutual funds, pensions, etc. Do you believe that there is room for significant action by through proxy votes by institutional investors such as CalPERS and responsible mutual fund managers?
Terence O'Hara: Any shareholder can exercise his right through the proxy voting process, big or small. And you see plenty of examples of it. MCI, Walt Disney and Hewlett Packard are three examples that come to mind where large sharheolders have influenced the outcome of mergers and board elections. But evaluating proxy votes takes time and money(there's even several consulting firms set up to advise institutional shareholders on their proxy votes).
David Hilzenrath: It appears that many institutional investors have no desire to play such a role. There are cases of effective shareholder activism, but there are also examples of apathy and wimpitude.
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Los Alamos, New Mexico: What do you think of the practice of giving CEOs enormous retirement packages while the employee pension fund is being turned over to the feds for administration or is not considered underfunded for regular employees?
Terence O'Hara: I think it would stink. Executive pensions or any retirement compensation should be subject to the same unfortunate vagaries as any other pensioner's benefits.
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washingtonpost.com: Thanks Terry and David for your time today. And thanks to all the readers who submitted questions. The complete executive compensation package is online here.
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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.
