For Jeffrey J. Steiner, chairman and chief executive of Fairchild Corp., nearly $2.5 million in salary last year was just the beginning.
The company's notice for its annual meeting lists various dealings between Fairchild and Steiner family interests. There were payments by Fairchild for a chartered helicopter and a chartered aircraft and an apartment in Paris. There were family members on the payroll, interest-free loans outstanding to family members, and $258,000 for Steiner's personal expenses, later reimbursed. There were $1.7 million in advances on his retirement pay, according to the proxy statement, on top of almost $3 million the year before, though Steiner did not retire.
And there was a triple dip of sorts related to the sale of a subsidiary to Alcoa Corp. at the end of 2002. Steiner received $3.1 million, part of a golden parachute from Fairchild, without bailing out. He also received a $5.2 million bonus from Fairchild for his work on the deal. And he and his son Eric, president and chief operating officer, got a noncompete and consulting contract with Alcoa worth $5 million over four years.
In addition, the company reported that it had spent $5 million on Steiner's legal expenses as of October and had posted a bond of more than $1.5 million with a French court before Steiner was convicted of a criminal offense last year in France. Fairchild reported that he was given a suspended sentence of one year and was ordered to pay a fine of about $597,000. The judgment related to "unjustified use" of a French oil company's funds in 1990, Fairchild reported.
Meanwhile, Fairchild, once the maker of the tank-killing A-10 jet, reported a loss of $53.2 million in the fiscal year that ended June 30, 2003, and had lost money in three of the four previous years.
James D. Cox, a professor of corporate law at Duke University, said Steiner's arrangements look like "shameless overreaching" and "a raid on the Fairchild treasury."
"Where was the board and what were they smoking?" he said.
Board members from fiscal 2003 either declined to comment, did not return calls, referred calls to the firm or could not be found.
In a statement to The Washington Post, Fairchild said it "has complied, and continues to comply fully with all laws and regulations applicable to its business."
"Consistent with accepted practices of corporate governance, a majority of Fairchild's directors are independent of management," the company said. "Many of the issues raised by he Washington Post are dealt with by independent directors who are elected in the customary manner by Fairchild's shareholders."
The company added that "bonus targets for senior management have been approved by a strong majority of outside shareholders for each of the last three years."
And Fairchild's independent directors are reviewing "issues arising from" the court proceedings in France, including expenses the company paid on Steiner's behalf, Fairchild recently reported.
The French court has ordered that part of Steiner's fine be withdrawn from the bond Fairchild posted for him, the company said in a recent filing.
Steiner, 67, who has headed Fairchild since 1985, and other executives declined to be interviewed, spokesman Howard Paster said. Through Paster, the firm invited The Post to submit written questions and then declined to answer most of them.
Steiner was among the dealmakers funded by Drexel Burnham Lambert during the 1980s reign of "junk bond" king Michael Milken. He is less vulnerable to shareholder pressure than most executives because, through stock ownership and majority voting power, his family controls Fairchild.
Steiner, a native of Austria, grew up in Turkey and headed subsidiaries of Texas Instruments in Latin America and Europe before embarking on a career buying and selling corporations.
Fairchild, once known for making airplanes, had left that business by the time Steiner gained control in 1989. Before the sale of the Fairchild Fasteners subsidiary in 2002, the company's main business was making nuts, bolts, screws, and rivets used in airplanes. Since then, Steiner has largely reinvented the company, moving into the sale of clothing, helmets and other accessories for motorcyclists. Among other businesses, the firm owns a shopping center in New York.
Under Steiner, Fairchild has employed three of his children in recent years.
Fairchild's board has seven members besides Steiner and his son Eric. Long-serving directors include former internal revenue commissioner Mortimer M. Caplin, 88, who is a senior member of the Caplin & Drysdale law firm, and Herbert S. Richey, 82, president of Richey Coal Co. and chairman of Fairchild's audit committee.
Caplin referred questions to the company's general counsel, who did not return calls. Richey declined to comment.
The directors are "in an odd position," said Brian Foley, a compensation consultant at Brian Foley & Co. . "They in effect serve at the pleasure of the controlling shareholder."
Caplin and Richey, among other directors, had outstanding loans from the company as of June 30, 2003, according to the company's October 2003 proxy report, an annual filing for shareholders. The loans, extended before the government banned the practice, were for the purchase of Fairchild stock. The loans could be called in when the directors leave the board, the company has reported.
Over the years, Steiner's pay at Fairchild has inspired protests by shareholders, including a lawsuit more than a decade ago that prompted him to make some concessions. Compensation analyst Graef S. Crystal devoted a chapter to Steiner in his 1991 book, "In Search of Excess: The Overcompensation of American Executives."
In a 1998 Washington Post story, Steiner said he was "very aware" of criticism leveled against his compensation. "But when I compare my own income with some of the advisers at investment banks who are far more junior and far less knowledgeable about finance than me, I don't feel so bad," he said.
In 2001, Steiner compromised further after Mario Gabelli, head of an investment firm with a big stake in the company, filed a statement with the Securities and Exchange Commission calling Fairchild's compensation structure "unwarranted" and threatening to vote against all nominees to the Fairchild board. Gabelli complained at the time that "Jeff has got to wake up."
For four of the past five years, Steiner has had the highest salary in a Washington Post survey of executive compensation at the area's publicly traded companies.
Over five years, Fairchild's stock severely underperformed an index of its peers in the aerospace and defense industries. While $100 invested in the peer group in mid-1998 would have been worth $129.76 in mid-2003, assuming dividends were reinvested, $100 invested in Fairchild would have declined to $19.96, Fairchild said in its most recent proxy report to the Securities and Exchange Commission, filed in October 2003.
However, during the fiscal year that ended June 30, 2003, Fairchild's stock climbed from $3.40 to $4.03 a share. It closed last week at $4, and the company turned a profit of $7.1 million during the quarter that ended June 30, 2004.
Loans and Advances
The limited disclosures in Fairchild's SEC filings, sometimes phrased in legalistic language, offer only a partial understanding of Steiner's transactions and the company declined to provide further details.
Fairchild paid $66,000 during fiscal 2003 for the upkeep of a Paris apartment owned by a Steiner family company, Fairchild reported. The apartment was used "from time to time" by Eric Steiner when he was traveling on business, the company reported. "Overall, we believe our cost for such apartment is less than the cost of similar accommodations for our business related travel."
Before loans to officers and directors were banned in 2002 by the post-Enron corporate governance reforms, Fairchild extended no-interest loans totaling more than $500,000 to Steiner and two of his children, who worked at Fairchild, according to company filings. The loans were meant to encourage ownership of Fairchild's stock and "provide additional incentive to promote our success," the company reported.
In recent years, Steiner has gotten approval to receive $4.6 million from executive retirement plans without having to retire. Foley, the executive compensation consultant, said it was unusual for a chief executive to tap his retirement plan before retiring.
"It doesn't seem justified that the company should start paying out until they've finished paying salary and benefits of the executive," said Paul Hodgson, a compensation analyst at the Corporate Library, which provides information for institutional shareholders.
All of Steiner's retirement advances disclosed in its last annual proxy report, almost $1.7 million, came from an unfunded plan for Fairchild executives, according to the filing.
Fairchild reported that it paid $568,000 in fiscal 2003 to charter an aircraft owned by "an affiliate of Mr. Jeffrey Steiner." The company didn't identify the affiliate or explain the nature of the affiliation, but it said in another SEC filing that all of that money was a "prepayment . . . for the future use of the aircraft." Fairchild said it paid $308,000 for use of a helicopter owned by a Steiner company.
Fairchild reported that it paid 5 percent less than the going rate for the helicopter and market rates for the other aircraft.
As a general matter, owning an aircraft and leasing it an generate tax benefits.
Starting Jan. 1, 2003, Steiner deferred 20 percent of his base salary, the firm's proxy report said without explanation. Yet by June 30 of last year, Fairchild had paid $258,000 for "personal expenses" of Steiner, the company reported. Steiner reimbursed the company in August 2003, the company reported.
Fairchild did not explain the specific nature of the expenses, over what period they were incurred, why the company paid or whether Steiner paid the company interest on the money.
If somebody determined after the fact that the company had paid expenses that were personal rather than business, "it could be that it was in effect an unauthorized loan," said Lyman Johnson, a professor of corporate law at Washington and Lee University. But Johnson added that "if it's an innocent mistake, then I don't think that any sanction should follow."
Fairchild reported that the amount Steiner owed the company in 2003 never exceeded the amount that the company owed him as deferred salary.
Separately, Fairchild reimbursed Steiner for $75,000 of entertainment expenses "which benefit the company," Fairchild reported. That covered just "a portion" of Steiner's entertainment expenses, the company reported.
Other Payments to Steiner
Steiner could have taken home more money if the board had not stepped in, company filings show. Under an unusual incentive plan, Steiner was entitled to up to 2.5 percent of the money Fairchild received from selling pieces of itself. For the $657.1 million sale of the fastener subsidiary to Alcoa, that would have amounted to $16.4 million, the company reported. Instead, the board's compensation committee decided that he should get a $5.2 million bonus related to the sale.
The Steiners also negotiated a $5 million side deal with Alcoa in which they personally agreed not to compete with the business Fairchild sold Alcoa and to be available as consultants to Alcoa.
Noncompete payments are commonly made to employees with critical knowledge of a subsidiary's operations or customers, said John F. Olson, a corporate lawyer at the firm Gibson, Dunn & Crutcher LLP. Speaking generally, Olson said they are not typically awarded to chief executives who are primarily investors, financiers or turnaround specialists. He added that they can be used as inducements to get executives or major shareholders to go along with a deal.
"The burden of proof is really on the board to explain why that money belongs to the executives and not to Fairchild's shareholders," said Nell Minow of the Corporate Library.
John C. Coffee, a professor at Columbia Law School specializing in corporate law, said that, as a general matter, non-compete payments to chief executives or controlling shareholders when a subsidiary is sold can be a means of diverting to those individuals money that should go to all the shareholders as part of the sale price.
Asked whether Alcoa or the Steiners sought the noncompete contract, Alcoa spokesman Kevin Lowery said by e-mail, "No one can recall who first came up with the idea, but it's fair to say that at the end of the day it was a mutual agreement."
Lowery would not say how much time the Steiners have spent consulting for Alcoa.
On top of the other payments, Steiner received what is known in the parlance of the boardroom as a "change of control payment." Those are often triggered when an executive loses his job in a takeover. Also known as golden parachutes, they are commonly written into executives' employment contracts to compensate them for loss of their job or demotion if their company is taken over by another. They were invented to neutralize an executive's incentive to resist deals that might benefit shareholders but leave the executive unemployed, said Randall S, Thomas, a professor of law and business at Vanderbilt University Law School.
Fairchild reported that contracts of its executives entitled them to change of control payments if the company sold "substantially all of our assets," and Fairchild said the fastener business represented about 68 percent of its assets.
Steiner's employment contract also linked any change of control payment to the termination of his employment, according to documents filed with the SEC.
However, Steiner received a change of control payment without giving up his position at Fairchild. After selling the fastener business to Alcoa, the company struck a new deal with its chief executive, allowing him to receive half of his $6.3 million change of control payment in 2003 and the rest when his employment ends. In return, Steiner agreed to stay on the job.
Staff researcher Richard Drezen contributed to this report.
has headed the firm since 1985.A salary of nearly $2.5 million was just the beginning of Fairchild Chairman Jeffrey J. Steiner's total 2003 compensation.