CEO pay continues to climb in Washington area
By Danielle Douglas,
Profits at Discovery Communications soared last year, and so did chief executive David M. Zaslav’s pay. The head of the Silver Spring cable programming giant scored a 23 percent raise to $52.4 million in total compensation in 2011, making him the highest paid executive at a public company in the Washington area for the second year in a row. His raise, generous as it was, was still far more modest than the 264 percent boost he recorded in 2010. Indeed, the eye-popping compensation witnessed two years ago, when companies rewarded executives for guiding them through the bust, was tempered last year as the economic recovery slowed.
Whereas local chief executives saw their pay packages swell more than 20 percent coming out of the recession, awards rose just 2.5 percent last year, according to a study conducted for Capital Business by Equilar, an executive compensation research firm.
Some analysts attribute this reduction to shareholders gaining the right to vote up or down on executive pay. Though the “say on pay” tally is nonbinding, supporters believe it is placing pressure on companies to be more conservative.
“Say on pay has made everyone more attuned to establishing a dialogue with shareholders ... as a result, you’ve seen a substantial decrease in problematic pay practices — excessive perks, tax gross-ups,” said Mark Borges, a principal at Compensia, a compensation consulting firm.
But critics point out the rich still got richer last year, as even a 2.5 percent rise was greater than what workers overall received. Compensations for private industry employees crept up 1.5 percent for the year, according to the Bureau of Labor Statistics.
And averages are just one measure. Median pay among Washington’s top executives actually shot up 22 percent to $3.1 million in 2011, according to Equilar’s analysis.
“Given that most workers only received a pay increase that barely kept up with inflation, executive raises in the double-digits is extraordinarily healthy,” said Brandon Rees, deputy director of the AFL-CIO’s office of investment.
Public companies in the region did curb cash bonuses and options last year, but instead gave leaders robust stock grants and higher salaries. Since the downturn, boards have given a larger portion of pay in stock and options to align executives’ potential payout with that of shareholders.
Stock grants, up 18.1 percent from 2010, are increasingly tied to company performance, meaning CEOs must meet set goals, such as generating higher profits or revenue, before cashing in shares. Area businesses, however, pulled back from awarding options, down 19 percent from the past proxy season.
“Options are not the best tools for aligning executive and shareholder interests,” said Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “With restricted stock, if the company does poorly, you see wealth loss. If an option is under water, it just means you’re not going to get a big return.”
In the case of Zaslav, 84 percent of his compensation was derived from stock and option awards, much like the year before. Discovery’s stock was essentially flat last year, but the company credits its chief with tripling the share price from 2008 to 2011.
Officials at Discovery declined to comment for this story, instead pointing to the company’s proxy statement, in which Zaslav is praised for “driving international growth ... producing quality content” and the company’s “overall strong performance.”
Revenue at Discovery climbed 12 percent to $4.2 billion last year, while net income from continuing operations soared 75 percent to $1.1 billion. All this, despite the flagging performance of the Oprah Winfrey Network, in which the firm holds a 50 percent stake.
Pay for performance?
Zaslav’s compensation not only helped him retain his title as the highest-paid CEO in Washington, but also made him the sixth highest paid executive in the country. He shares the upper echelon with Oracle’s Lawrence J. Ellison and David Simon of Simon Property Group, executives whose companies recorded well over 30 percent earnings growth in 2011.
Market watchers say executive compensation last year was more closely correlated to company earnings and, in some cases, stock performance. Chief executive pay trended up alongside net income at 40 percent of the 70 local companies who had the same leader on the list in 2010 and 2011.
Malon Wilkus of American Capital Agency, for instance, received a 52 percent pay raise to $13.1 million as the financial services firm reported a 167 percent increase to $770 million in profits.
In 11 cases where net income declined — including at Vocus, ComScore and FBR & Co. — so did executive pay. Not all compensation aligned with profits, but in most instances where raises exceeded net income growth a majority of the pay was performance-based stock or options.
“Companies are putting more energy into telling a much clearer story about how they think pay and performance are connected,” said Charlie Tharp, executive vice president for policy at the Center on Executive Compensation. “They want shareholders to understand how they arrived at their determinations.”
At General Dynamics in Fall Church, chief executive Jay Johnson received a 16 percent pay raise to $16 million tied to “earnings from continuing operations, free cash flow from operations and return on invested capital,” according to the proxy statement.
“These metrics are good indicators of the company’s overall performance and lead to the creation of long-term value for shareholders,” the compensation committee said in its proxy filing. General Dynamics declined to comment beyond what it stated in the proxy.
While the defense contracting firm grew in all prescribed metrics, it fell short of its own projected goals.
The committee said it weighed “several items which negatively impacted the company’s 2011 results, including significant delays in defense contract awards and the impairment of an intangible asset in the Aerospace group.” But it was heartened by increased sales of $32.7 billion and the completion of six acquisitions valued at $1.6 billion.
Johnson, the sixth highest-paid executive in the region, was one of three defense contractors in the top ranks. Wesley G. Bush of Northrop Grumman was the third-highest paid executive at $20.9 million. Ranking fourth was Robert J. Stevens of Lockheed Martin at $20.5 million.
There were some other familiar faces in the top tier such as Capital One’s Richard D. Fairbank, who moved up two slots into fifth place, with reported pay of $18.6 million. As has been the case since 1997, he did not receive any salary or bonus, just equity shares.
A few new entrants made their way onto the upper rungs of the pay ladder this year because of sizable equity awards. Take, for instance, Host Hotels & Resorts’ W. Edward Walter, who climbed to 10th place with $9.9 million in pay. He received an $8.1 million performance-based stock award at a time when the lodging real estate investment trust grew revenue 13 percent to $5 billion.
While ITT Exelis did not crack the top 10, the defense contractor took the 13th highest spot by bestowing $8.7 million on its chief executive, David Melcher. Officials from the firm, which spun off from ITT Corp. late last year, explained that he received a one-time equity award of $5.7 million for taking the helm at the newly formed company.
Meanwhile, there were a few quirky pay packages. At Dupont Fabros Technology, Hossein Fateh’s salary totaled only $1. But he received a $464,000 allowance for use of a corporate jet. Geeknet’s Kenneth G. Langone, for his part, received not a penny for his role as chief executive, but accepted $50,000 in restricted stock as chairman of the board.
Equity awards were stripped from Paul C. Saville’s compensation, leaving the NVR leader with $807,850 in pay, a 97 percent drop from 2010. Similarly, Cogent’s David Schaeffer’s pay fell 58 percent to $1.6 million.
Neither NVR or Cogent responded to requests for comment. In NVR’s proxy filing, however, the company said it was “re-evaluating our compensation philosophy and practices” because of the negative shareholder vote.
Protests against pay packages are on the rise this year, though shareholders are primarily giving a thumbs up on raises. Of the 1,821 say-on-pay ballots held as of June 20 at the largest public companies nationwide, 2.7 percent, or 49 of them, have failed, according to consulting firm Semler Brossy.
Only 29 companies had their pay strategies rejected around the same time last year. There were no failed votes at Washington area companies this year, but several had more than 30 percent “no” votes, including Vocus, Cogent and USEC.
Rees of the AFL-CIO is reluctant to call the voting rule a victory, but he noted a few instances where it did sway compensation committees.
“Walt Disney and General Electric made changes to their existing employment agreements to get higher levels of support on the eve of shareholder meetings. That wouldn’t have happened without say on pay,” he said. “But CEO pay continues to rise. The average S&P 500 CEO made 380 times the average worker’s pay last year, back in 1980 it was 42 to 1.”