Executive Compensation

Washington Post staff writer Terence O'Hara was online to discuss the annual examination of compensation levels for area executives on Monday, July 10 at 2 p.m. ET .

A transcript follows.

Read today's stories:

Many Executives' Paychecks Swelled, No Matter How They Did

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

Determining Pay at Freddie Mac, Fannie Mae

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Terence O'Hara: Hello. This is Terence (Terry) O'Hara, a local business reporter at The Post. This is an online discussion about how much money other people make, namely executives at Washington's largest companies. There's lots of questions in the que so let's get started. My colleague David Hilzenrath should be joining us soon.

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Fairfax, Va.: After Enron and the other high profile corporate malfeasance in the last several years, has it had any effect locally to improve corporate governance and modify largely out of line executive compensation locally and nationally?

Terence O'Hara: Generally, according to various studies, the use of stock options and outsized pay packages declined after the stock market bubble popped in 2000. The use of options, especially, declined after the 2002 Sarbanes-Oxley law. However, locally, pay packages, including options, appears to be on the rise. This may have something to do with performance. Overall, Washington's public companies, which are concentrated in the real estate, financial services, government contracting, hospitality and service industries, have performed very well in recent years. But that is a generalization. One can find plenty of examples of large pay packages that are divorced from performance.

With regards to corporate governance, my impression is that yes, generally, it has improved. There are more independent directors calling the shots on things like accounting policy, internal controls and executive pay. "Independent" is in often in the eye of the beholder, however.

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Tampa, Fla.: Do any of the companies mentioned in your excellent series have INDEPENDENT compensation committees on their boards of directors?

Requiring this was bandied about when Sarbanes-Oxley was working its way through Congress. I recall the business community opposed this far more vehemently than it opposed requiring independent audit committees. As long as setting compensation is "you scratch my back and I'll scratch yours" we'll be stuck with CEOs getting pay awards having little to do with performance.

Also, stock option grants do not align the interests of the grantees with those of the shareholders. Dividends are the most obvious example. Paying dividends is great for shareholders, but bad for option holders. Option holders do not get dividends. They instead see the assets of the corporation reduced. The value of an option depends in large part on the value of the assets of the corporation. The less the value of the assets, the less the value of the options. This is why large cash dividends cause the value of stock options to drop, more so than the value of stock. So option holders actually have interests adverse to those of shareholders.

So if you want to align the interests of management with those of shareholders, don't use options!

Terence O'Hara: Of the hundred or so local public companies that I examined, all of them have compensation committees that are made up of independent directors. There's the concept of "interlocks," wherein one CEO sits on the compensation committee of another CEO's board, and vice versa. I saw none of that.

You make some good points about the usefulness of options in aligning the interests of management with shareholders. More companies these days are using restricted stock in lieu of options, though not all. The executives with the largest total compensation packages on our list are there because they had large option grants last year.

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Washington, D.C.: You don't see too many women on this list. Compared to previous years when The Post has analyzed this data, has the number of women been about the same? more? less?

Terence O'Hara: We haven't done a scientific, historic study of the number of women in the highest-pad ranks. I've been doing this project for five years, and I would say that from memory the number of women among the highest paid has increased, if at all, only a little. The top ranks of public companies remain overwhelmingly male. And while you see more women in positions of leadership at public companies, cracking into the top ranks remains a very rare occurance. This year, however, you had some women come into some big money. Martine Rothblatt at United Therapeutics was granted options that made her total compensation package worth more than $31 million. And Joan Sweeney, the longtime executive at Allied Capital, was paid more than $4 million last year, most of it in cash.

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Washington, D.C.: Before we start complaining about how much CEOs are paid; these guys add value to the company in contrast to people like Katie Couric that makes $15m a year. I wonder what value she adds...

Terence O'Hara: These sort of comparisons always fascinate me. There's the concept of the "key man" or the "superstar" system, wherein a very few individuals are considered so valuable that they can command virtually any compensation. You see this in sports and entertainment, especially, and in corporate suites, as well. I would argue that it can't be demonstrated that every CEO adds value to a company. I don't know enough about broadcast news economics to know if K. Couric is worth that much. Seems like a heck of a lot, but network television is a monster money maker.

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Arlington, Va.: Why do you think that the executives at Fannie Mae who benefited financially from what we now know was 'creative' bookkeeping, are not taking the high ground and returning their ill-gotten gains? Greed? Sense of entitlement? It would seem to me that if what Dan Mudd says is true, that the culture of Fannie Mae has changed dramatically, why not show it?

Terence O'Hara: Fannie Mae argues that the executives respsonsible for the accounting problems are no longer with the company; specifically, former CFO Timothy Howard and former CEO Franklin Raines. Both of those men were paid tens of millions while they were at Fannie, and were given generous departure packages when they left. The Fannie story is far from over, however, and both the government and the company itself may seek some return of those monies. The question remains: Should compensation that is based on performance criteria such as earnings per share be returned if the earnings per share turned out to be false? Ultimately, that's up to each board of each company.

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Silver Spring, Md.: How do you find out what stock options an executive has exercised? Is it in an FTC filing?

I am curious because the rank and file employees were "given" some stock options several years ago by our company - and our stock has never risen a penny over what we could exercise those options at. But I would love to know if the top bosses have been in the same boat with us on the options. (this is a fortune 500 company not a mom and pop)

Terence O'Hara: Option exercises are disclose (or should be) within two business days of the exercise, with the Securities and Exchange Commission, on what is known as a Form 4. Also, in the annual proxy statement, total option exercises for each senior executive are listed, including how much money they made on the exercise.

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Sherman Oaks, Calif.: It seems that money itself is the most important indicator of increases in compensation. If you can afford to take good care of the company directors who decide your salary level, you are rewarded regardless of job performance. One hand washing the other often leaves both hands dirty.

Terence O'Hara: Indeed at many companies directors are paid a fair piece. I've seen directors fees rise above $100,000 for committee chairs. In addition, directors often have the opportunity for incentive pay, such as stock options. But it's not clear that the amount of money a director is paid is what drives huge pay packages. There's a variety of pressures on directors that cause executive pay to rise. Most convincing to me is the argument advanced by Lucien Bebchuk at Harvard: that there is no market to help directors arrive at a pay level for their senior managers, so they have no incentive or even ability to "drive a hard bargain" with a chief executive. There's always the soft pressures at work, I'm sure. I'm sure no director relishes the idea of negotiating a CEO's pay package, especially with someone who many directors view as a partner, not an adversary.

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Bowie, Md.: Point about Katie Couric: The TV network makes money off of her based on how much companies are willing to pay for commercial slots, and for a long time, she's been America's sweetheart and able to pull in vieweres. CEO's though, make money based on how their companies perform (ie. options and bonuses) but their cash salary is based on their negotiated contracts from when they accepted the job. Two different things.

Terence O'Hara: Good point.

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Washington, D.C.: Your list gives the top 100 cash and top 100 total compensation. Is there data available that extends past the Top 100?

washingtonpost.com: Online databases:

Top 100 by Salary .

Top 100 by Compensation .

Terence O'Hara: Yes, there is, though we don't publish the information and don't make it available online. It's a huge database, going back four years, and has thousands of names.

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Washington, D.C.: What is the average CFO salary for an experienced person in the D.C. area?

Terence O'Hara: That, I don't know. I had hoped to be able to do a separate analysis of pay by title, but time did not allow it. Send me an e-mail and I'll see what I can gin up for you in a day or two. oharat@wasphost.com.

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Silver Spring, Md.: Color me cynical but I think this has been covered pretty accurately through the years by the "Dilbert" cartoon strip.

Terence O'Hara: Hasn't it, though?!

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Anyomous: Seeing the salary of the featured telecom exec really made me shudder. Seems that if our company is floundering in any way, some of these guys could give it up to keep the ship sailing.

I am truly disgusted overall at how much money these men make. It would be nice to do a story at how much they give back to the community with their personal funds.

Terence O'Hara: I found only one example this of an executive voluntarily reducing his salary for the benefit of the company: Gary B. Smith, at telecom equipment maker Ciena. Such an action is not unheard of. Usually, however, they forgo some current compensation with the promise of greater reward down the road if the company's fortunes improve.

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Boston, Mass.: My assumption is that dramatic cuts in the super-high end of the income tax brackets are largely spurring the rise in executive pay.

Another way of looking at it-- top executives are highly competent at and motivated toward accumulating money and power -- its a talent that makes them good at their jobs. Just about the only short-term brake on them increasing their share of the pie is taxes. As that brake has been lifted, one would expect executives to start pulling in more cash.

Long-term, employee and stockholder discontent and competitive failures may come into play, but the only immediate disincentive, I would think, are taxes. And those have been drastically cut for those getting more than $1 million per year, correct?

Terence O'Hara: I haven't seen any evidence that tax policy affects top executive pay whatsoever. It just affects the components of pay, not the total. Companies just find a way of getting around tax rules that seek to limit outsized pay packages. The tremendous increase in incentive pay (bonuses, options, etc.) is tied indirectly to a tax rule that imposed excise taxes on salaries over $1 million. And, routinely these days, comapnies offer "gross ups," special payments to make taxable benefits, in essence, tax free.

As to the broader issue of tax policy toward the wealthy, I'm no qualified to answer. But I'm not sure that a repeal of the estate tax, for instance, matters a whit what companies pay their executives. These guys are getting richer, regardless. Perhaps someone would be able to come up with a tax regime that would put a hard ceiling on executive pay, but I'm not sure it would be politically palatable for Congress to go monkeying around with that.

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Washington, D.C.: Another very interesting fact. A lot of these CEO's and highly paid individuals don't have backgrounds that match their company's jobs. For example, I once surfed the Goldman Sachs Web site, and they profiled some of their hot investment bankers. Many of them graduated from college with cheesy degrees in Art History or psychology, nothing involving business or finance. Of course, most of them went to top schools and probably got their jobs from alumni connections, and of course, many probably went off to get their MBA's at Ivy leage schools afterwards, but it was fascinating to learn. I know of a friend who works for a pharma company who used to be a webmaster and is now President and CEO.

Terence O'Hara: All you art history majors, do not lose hope!

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Terence O'Hara: Though the executive cup runneth over, our time runneth out. For any employee or shareholder who wants to know how much their public company bosses are paid (and why), I encourage you to look up said compensation with the SEC. Knowledge is power. Cheers.

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