The stock market has been good to area executives.
Total pay for Washington’s highest-earning executives rose nearly 7 percent last year as compensation packages benefited from healthy gains in share prices.
Among chief executives of the region’s largest public companies, median pay totaled $3.11 million in 2013 compared to $3.22 million a year earlier, according to the 2014 Capital Business/Equilar CEO Compensation Study. The 10 highest-paid executives pulled in a combined $198.8 million, compared with $195.1 million a year earlier.
“Pay for executives is going up as they’re reaping the benefits of higher stock prices,” said Aaron Boyd, director of governance research at Equilar, an executive compensation data firm. “Shareholders like performance-based bonuses with specific goals and metrics much more than they do a typical discretionary bonus.”
Analysts say the benefit of a roaring stock market has been two-fold for Washington leaders. Executives are increasingly being judged on the performance of their company’s share price (as opposed to metrics such as revenue or income, which were often used in the past), and they are receiving more of their compensation in stocks and options.
The higher the stock market soars, the more their pay packages are worth, even if a company’s profit or revenue lags.
Topping the list of the area’s highest-paid executives was Martine A. Rothblatt, founder, chairman and chief executive of drugmaker United Therapeutics, who received $38.22 million, a 665 percent increase from the year before. Stock options accounted for $36.1 million — or about 95 percent — of her pay.
Rothblatt was one of six women on the list of 98 highest-paid executives, including three in the top 10. The others included Phebe N. Novakovic (No. 5), chairman and chief executive of General Dynamics, and Marillyn A. Hewson (No. 7), president and chief executive of Lockheed Martin, both of whom were appointed to lead the respective defense contractors in January 2013. Gracia C. Martore (No. 22), president and chief executive of Gannett; Lisa A. Hook (No. 36), president and chief executive of Neustar; and Kathryn K. McCarthy (No. 91), president and chief executive of Geeknet, were also on the list.
Rothblatt’s ascent to the position of top earner, after being ranked 28th the previous year, reflects just how much executive pay is now linked to the whims of the stock market. Shares of United Therapeutics, a Silver Spring-based biotechnology company, more than doubled in 2013, closing the year at $113.08, up from $54.39 on Jan. 2. (Shares have since fallen to about $87.)
United Therapeutics has long had a two-pronged approach to option awards for its chief executive, according to Michael Benkowitz, executive vice president of organizational development at the company. Rothblatt is eligible to earn a number of options if the company’s share price rises in a given year. But there is also another component: Rothblatt can only cash in those options if the company’s share price rises higher within the next 10 years.
“The way the formula works, if the market cap decreases, she gets nothing,” Benkowitz said, adding that has been the case three times in the past decade.
“Our view is that this is one of the strongest performance-based compensation programs in the industry,” Benkowitz continued. “It creates great alignment with our shareholders. If shareholders win, the CEO is compensated.”
Last year, United Therapeutics’ revenue rose 22 percent to $1.12 billion. Profits, however, fell 43 percent to $174.56 million.
“Performance-share plans are on the rise,” said Jannice Koors, managing director at Pearl Meyer & Partners, a New York-based executive compensation consulting firm. “As companies have good years, you start to see some really big numbers.”
The shift toward stocks — a more volatile form of payment than cash — may have also helped push up the overall value of compensation packages, said Gary Hewitt, head of research at GMI Ratings, a New York-based governance advisory firm
“One of the consequences of performance-based stocks is that pay levels have, in some cases, explicitly been raised because it’s more risky,” Hewitt said. “It’s a riskier pay package than paying in cash.”
Overall, option awards— which allow employees to buy a certain number of shares in the future at a price set now — rose nearly 46 percent among executives of the area’s largest public companies in 2013. Discretionary bonuses, meanwhile, fell by 45 percent.
In keeping with national trends, just 15 of the 89 highest-paid executives received bonuses last year, down from 17 in 2012, and 22 the year before, reflecting a broader move away from discretionary payouts. (In 2007, for example, 98 percent of Washington’s highest earners received bonuses.)
David M. Zaslav of Discovery Communications, previously the area’s highest-paid executive, dropped to No. 2, with $33.35 million in pay, one-third less than the $49.93 million he brought in in 2012.
Among those with the largest leaps in pay last year included Paul C. Saville (No. 19) of NVR, whose compensation rose 328 percent; Jon E. Bortz (No. 11) of Pebblebrook Hotel Trust, up 230 percent; and Timothy J. Naughton (No. 9) of AvalonBay Communities, up 197 percent.
Nationally, a similar survey conducted by Equilar for the Associated Press showed last year’s median pay for chief executives topped eight figures — that’s more than $10 million — for the first time.
The data comes amid an uneven economic recovery that has seen middle-class incomes make little progress. In the Washington metropolitan area, for example, average annual wages grew an estimated 0.8 percent to $64,260 between 2012 and 2013, according to the Bureau of Labor Statistics.
“Unfortunately for the average worker, their pay is not based on the stock market,” said Charles Tharp, chief executive of the Center on Executive Compensation, a group established by an association of human resource directors. “In many respects, this is a continuation of what we’ve seen across the last two or three years.”
However, not all companies emphasize stock performance when it comes to pay.
Michael Tessler (No. 23), president and chief executive of BroadSoft, received $6.22 million last year — nearly triple the $2.23 million he made the previous year — even as the company’s stock price tumbled 26 percent. BroadSoft, a maker of telecommunications software, saw its revenue rise 8.3 percent but also posted a $8.9 million loss in 2013.
The company did not return a request for comment before deadline. It offered the following explanation in a March 21 filing with the Securities and Exchange Commission: “In seeking to set competitive base and incentive compensation, ... in certain circumstances, we may be required to pay executives at somewhat higher rates, commensurate with the individuals’ experience, and to recruit and retain these executives, who have competing employment opportunities.”
More than 73 percent of BroadSoft’s shareholders rejected the pay package as part of advisory “say on pay” provisions, which allow shareholders to vote on proposed salaries, stock options and bonuses. (The previous year, when shares had risen about 20 percent, the company’s pay package had passed with a 99.5 percent approval rate.)
Although large executive pay packages still abound four years after “say on pay” was implemented, analysts say the nonbinding vote has forced some companies to do away with practices such as tax gross-ups, in which firms pay taxes on behalf of its executives.
“Are compensation committees paying more attention because of ‘say on pay’? Certainly,” Hewitt said. “Companies are addressing the worst practices, piece by piece.”
In the coming years, some industry analysts say they expect compensation figures to rise further as executives cash in on time-restricted stocks and options they received during the economic downturn.
“In order to maintain the value of awards, a number of companies granted enormous numbers of shares or enormous numbers of options,” Hewitt said. “I suspect we’ll see jaw-dropping numbers in the next three or four years.”