Not all companies are enthusiastic about being included in The Washington Post's annual executive compensation survey.
"The material is correct," a representative of a local real estate developer wrote in an e-mail response to a request to confirm her company's pay and perks, "however, we would like to be excluded from the list."
Well, no. This annual survey covers top executives of local companies that file executive compensation information with the Securities and Exchange Commission -- 764 executives from 157 companies for this survey, which was based on compensation from the companies' most recent fiscal years -- and is drawn from that publicly available data.
The information compiled from the SEC reports was sent to the companies for confirmation of accuracy, and most companies responded. Errors were corrected, and other concerns were discussed with company representatives.
Cash compensation is seldom disputed -- salary and bonuses are paid and recorded clearly -- but stock options and long-term compensation are a different matter. Companies and their auditors and attorneys use a number of different standards to measure such benefits.
For purposes of uniformity between companies and continuity from year to year, The Post has traditionally chosen the same way of accounting for these non-cash benefits. In particular, the survey values options by assuming a 5 percent appreciation compounded annually, but not including dividends, over the life of the option. For example, Lockheed Martin Corp. awarded it president and chief executive, Robert J. Stevens, 175,000 stock options, with an exercise price of $49.27 share, that he could purchase for $8.6 million. Assuming that the share price grew 5 percent each year over the maximum 10-year life of the options, Stevens would benefit from a $5.4 million increase in the value of the shares.
That is one of several ways the SEC permits companies to report option values.
Many companies prefer the more conservative Black-Scholes model, which usually makes their option values look smaller. This method considers such factors as the volatility of a company's stock. The problem, particularly when comparing the value of one company's option grants with another's, is that companies use different assumptions in their Black-Scholes models. Since The Post is not privy to those assumptions, the survey uses the 5 percent valuation.
Among the companies taking exception to that approach was WGL Holdings Inc., the parent of Washington Gas. Tim Sargeant, the company's director of media relations, wrote in response to the survey results for his company that the 5 percent appreciation method "overstates the value of stock options in the year that they are granted."
"For example," Sargeant said, "the value of stock options shown by the Washington Post for WGL Holdings, Inc.'s Chairman and Chief Executive Officer, James H. DeGraffenreidt, Jr., is over six times greater than the amount shown in the proxy statement of the Company on the page shown." DeGraffenreidt's options were valued at $216,506 in WGL's SEC filings, compared with $1,456,684 in The Post's survey.
And a local defense contractor wrote that "the treatment of options is highly misleading" because options vest over a number of years "and may or may not have value depending on how the stock performs."
Of course, stock also may perform better than 5 percent annual appreciation -- the SEC permits companies to assume 10 percent appreciation as well. On the other hand, when options are "under water," the price at which an executive can buy the stock is higher than the shares are trading for, some companies "re-price" previously granted options downward to guarantee they will be profitable.
For this survey, The Post classified the components of total compensation into five categories: salary, bonus, other long-term compensation, the potential value of option grants and all other compensation. Salary and bonus are, of course, cash payments. "Other long-term compensation" covers two types of compensation that reward an executive for achieving long-term performance goals. They are, typically, restricted stock awards -- company stock that an executive is not allowed to sell for a specified period -- and long-term incentive plan payouts, which are cash compensation tied to the company's achievement of long-term goals for revenue, profits or other measures.
Options that an executive exercised in the survey year were not included in total compensation. Also not included were "reload" options -- those granted as part of exercises of options granted in previous years. "All other compensation" is a grab bag that includes such items as reimbursement of relocation expenses, payment of life-insurance premiums or country-club memberships, use of a company car, corporate contributions to an executive's savings plan and reimbursement of taxes -- anything the company pays for.
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.
All public companies are required to file executive compensation figures with the SEC, as are relatively few private companies. A handful of companies were not included in this survey for various reasons, most notably because they are having accounting troubles and have not filed their 2004 financial documents with the SEC. These include mortgage lending company Fannie Mae and consulting firm BearingPoint Inc.
Washington Business Editor Larry Liebert supervised the compensation survey. The data were collected by editor Kathleen Cahill and business section administrator Andrea Caumont and reviewed by staff writer Terence O'Hara. Section art director David Murray produced the informational graphics. The Post's Ed Holzinger and Jacqueline Dupree provided technical assistance.