Martine A. Rothblatt has led a Silver Spring biotech, United Therapeutics Corp., to profitability but received only half of her potential bonus last year because the company missed some stringent financial targets set by her board.
It didn't hurt the chief executive's paycheck too much, though: She still received other pay valued at $47 million, partly because the board replaced stock options that had become worthless with ones that have a greater chance of making money.
A variety of pay programs contributed to some of the most lucrative pay packages among Maryland CEOs last year. After Rothblatt, who made the most in the state, Raymond A. "Chip" Mason received a compensation package worth $40 million from Legg Mason Inc., and about 50 other CEOs earned at least $1 million in total pay, according to a survey by Salary.com of 100 public companies with headquarters here.
The Sun commissioned the survey, which is based on data obtained from proxy statements and other public filings, and on Salary.com's estimates of the future value of stock options.
Although "pay for performance" has become the catchphrase in boardrooms, executive compensation continues to swell at companies thriving and not, large and small, through practices that have drawn scorn from investor groups and labor unions.
Critics complain that the process is rigged in favor of chief executives and can lead to one-time surges in pay.
"No CEO is so talented that his or her compensation should be unlimited," said Brandon Rees, assistant director of the office of investment at the AFL-CIO. "Every dollar in excessive executive compensation comes out of shareholders' pockets."
One disputed pay practice that companies use is reloading, or re-pricing, stock options -- effectively giving executives a second chance to benefit. They also link bonuses to financial measures that swing upward with a merger or acquisition. They boost payouts above previously set ceilings or dole out retention bonuses and restricted stock that reward executives for sticking around.
With corporate profits rising and stock markets holding steady through last year, the debate over executive pay has shifted from demands that CEOs deliver stellar results to also ensuring that they aren't paid excessively.
Shareholder anger erupted this year at companies including Exxon Mobil Corp., where former chief Lee Raymond, lauded in the past for record earnings and a highflying stock price, weathered flak at the petroleum giant's annual meeting over his hundreds of millions of dollars in pay and retirement benefits.
Nationally, the median CEO base salary of large companies remained flat last year at $975,000, while bonuses rose 8.4 percent, according to a survey by Mercer Human Resource Consulting.
Total compensation, including stock options and other long-term incentives, rose 5 percent to a median $6.8 million, an increase of 150 percent since a decade ago.
Compensation packages have become increasingly complex in recent decades, shaped partly by corporate-board philosophies on how best to align the interests of top executives and shareholders, company officials say.
An increase in one part of a pay package -- such as an equity grant -- coupled with cuts in other areas -- such as salary or bonuses -- is not contradictory, they say, but rightly rewards different objectives, including building profits and thinking strategically for the long term.
"Yes, there can be higher rewards, but I disagree with the idea that executives can't lose," said Chris McGee, a principal at Mercer who works with several companies in the Baltimore-Washington corridor. "With executive compensation, you see a couple of egregious situations here and there, and then it's taken like all executives are pigs."
Company officials also say that stock options are technically worthless initially. Options allow executives to buy stock at a specified exercise price that is set at current market prices on the day they are granted. Their eventual value depends wholly on whether, and by how much, a stock rises subsequently.
Nonetheless, companies must assign a value to granted options under federal disclosure rules, and many use some version of an algorithm that assumes the stock will gain.
To allow for uniform comparisons among companies, Salary.com calculated the value of options by using the Black-Scholes method, named for economists Fischer Black and Myron S. Scholes, who devised it in the early 1970s.
Salary.com plugged into the formula standardized assumptions on interest rates and other factors. Because of that, its computed values for stock options differ from those assigned by the companies in many cases, sometimes substantially.
CEO pay has ballooned in recent decades for many reasons. Some say the main one has been the unintended consequences of government regulation.
In the early 1990s, two events spurred compensation to new heights: Congress passed a law limiting to $1 million the amount of executive pay that isn't linked to performance that a corporation could deduct on its income tax return; and the Securities and Exchange Commission required that companies disclose pay in tabular reports that allowed for easy comparison.
As a result, companies started paying executives through different vehicles, including stock options, and increased pay when they realized that corporate peers paid their executives more.
For the CEOs, information meant leverage. With the bullish stock market of the 1990s, "bass boat options" became the norm, meaning that the options conferred enough wealth for executives to buy a bevy of luxuries.
Harvard University professor Michael C. Jensen and Kevin J. Murphy, now at the University of Southern California, defended CEO compensation levels in a seminal 1990 article, "CEO Incentives -- It's Not How Much You Pay, But How."
They concluded that executive pay, adjusted for inflation, had barely budged in a half-century. There was no reason, they argued, that lawyers and sports figures should earn more than CEOs of multibillion-dollar enterprises whose ability to succeed affects employees, retirees, investors and customers.
What do they think now?
"We probably overshot," Jensen said. He and Murphy plan to publish this winter a book titled CEO Pay and What To Do About It.
"We have bailed out as being defenders of executive compensation," Jensen said.
Compensation consultants acknowledge the emotional reaction to the issue. But they say the implications for the nation and the economy could be greater in the long term if society fails to reward the competitiveness and innovation of a limited number of people who possess the skills and experience to run a large company.
"We don't want to kill the golden goose," said Pearl Meyer, a senior managing partner at compensation consulting firm Steven Hall & Partners. "We don't want to kill the entrepreneurial spirit in America."
At Silver Spring's United Therapeutics, which Rothblatt founded to develop a treatment for her daughter, who suffered from a lung disease, revenue jumped nearly 60 percent last year and net income more than tripled.
The board, in raising her salary 10 percent, noted in the annual proxy statement that it wanted to recognize Rothblatt for her "long-standing leadership, determination and perseverance."
Stock options formed the biggest chunk of Rothblatt's compensation in 2005. In a move that many companies used after the market bubble burst in 2001 and rendered scores of once-hot stock options out of the money, the board canceled 500,000 options awarded several years ago with an exercise price of $90 a share. It then reissued the same amount of options at lower exercise prices. In 2000, the company's stock zoomed as high as $132, far above the approximately $50 a share that the stock now trades at.
"It's hard to call something an incentive when it's so out of reach," said Fred Hadeed, the company's chief financial officer.
The board also awarded nearly 370,000 options for 2005 and delayed until last year the granting of about 300,000 options that the board had decided to award based on Rothblatt's performance in 2004.
By delaying that grant and the re-priced options, Hadeed said, executives were taking the risk that they would get options with higher exercise prices than the old options.
Mayo A. Shattuck III, Constellation Energy's CEO -- facing criticism for negotiating a multimillion-dollar severance package while Constellation's BGE utility was proposing a 72 percent rate increase -- made a total of $9.3 million last year, according to Salary.com.
That number does not include a $43.5 million paper profit that Shattuck made by exercising options awarded in previous years, a form of compensation that is typically not counted as pay within a single year. Shattuck still holds the shares, so he did not realize any cash from the transaction.
Constellation says it asked Shattuck and other executives to exercise options to minimize taxes that would be triggered by the Baltimore company's planned merger with FPL Group Inc. of Juno Beach, Fla.
It's not only options that can cause pay packages to soar.
At Legg Mason, the board awarded CEO Mason a $14 million cash bonus. Mason has drawn praise for engineering the acquisition of Citigroup Inc.'s money-management operations last year. That deal also served to boost Mason's bonus, which is tied to pretax income that grew when Citigroup's extensive operations were added.
Formulas that compute bonus levels as a percentage of accounting and other financial measures are discouraged by the Council of Institutional Investors, which represents 140 pension funds, precisely because bonus amounts can change greatly with a merger or acquisition.
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Legg Mason officials said the bonus is appropriate because the board intended to reward Mason for his efforts in closing the Citigroup deal and that Mason didn't earn the maximum bonus.
Also, officials said, the company limited the bonus by using pretax income from continuing operations, which excluded the company's $644 million gain from the sale of its brokerage to Citigroup.
Other pay vehicles, such as restricted stock grants essentially conveying blocks of shares to the executive over a period of time, are intended to ensure that an executive stays with a company.
At Host Hotels & Resorts Inc. in Bethesda, CEO Christopher J. Nassetta got $5 million in restricted stock in recognition of "significant total shareholder return" from 2003 to 2005, when the company's stock rose more than 110 percent, almost twice the rate of an index of its peers.
Although restricted stock has become a popular alternative to stock options, shareholder advocates don't like the idea. Jensen, the Harvard professor, said restricted stock "rips off the shareholders even more." He said, "Suppose you started with a $10 million grant and the stock price goes down 10 percent. Is that CEO still a happy guy? You bet."
Some companies have come up with other plans, some of which, critics contend, use subjective criteria that can be manipulated or use scant criteria.
At Fieldstone Investment Corp., a Columbia-based residential mortgage lender, the board decided to pay chief executive Michael J. Sonnenfeld $300,000 under the "senior manager incentive and retention bonus plan."
According to the company's proxy statement, the awards are earned as long as the executive is an employee in good standing, has not been terminated and has not left voluntarily.
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