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US: Many Executives' Paychecks Swelled

No Matter How They Did Compensation Tended to Climb Sharply in Three-Year Period

by Terence O'HaraThe Washington Post
July 10th, 2006

William L. Walton has been chief executive of Allied Capital Corp. for eight years. Many aspects of Walton's job have changed over that time, not the least of which is his paycheck.

Walton's 2005 cash compensation of $5.8 million was more than five times the $876,000 he was paid as a rookie in 1998. In the past three years his salary more than tripled, a bigger increase than any other local public company executive during that time, according to Securities and Exchange Commission records analyzed by The Washington Post.

In an interview, Walton said his pay was directly related to the business investment company's performance, and that in particular Allied was "hitting on all eight cylinders in '05," when he was awarded a $4.2 million bonus and a 5 percent, $71,154 salary increase. The company recorded a 250 percent increase in profit that year.

Not all Washington area executives point to such results.

An analysis of 282 local executives at 109 area companies who have had the same title from 2003 until the end of 2005 showed that merely sticking around gives an executive an excellent chance of getting a raise, sometimes a big one. In many cases, raises are dictated by employment contracts or other compensation practices that have nothing to do with an executive's job performance and are often divorced from the kind of market logic that dictates how most people are paid.

Call it pay to stay.

Chief executive Jon E. Bortz could point to a 45 percent increase in LaSalle Hotel Properties' operating profit in 2005 as well as strong shareholder returns for his 89 percent increase in cash pay from 2003, to $1.06 million. On the other hand, K. Paul Singh at Primus Telecommunications Group Inc. had no such numbers to support his 75 percent salary increase over the past three years: His company's shareholders have lost 62 percent of their investment since then, and his company has had more than $100 million in cumulative losses. He makes $700,000. A spokesman for Primus could not be reached for comment.

From 2003 to 2005, the median increase in cash compensation among the executives studied was 18.7 percent. Cash compensation is the executive's salary and bonus. The median is the midpoint, with half higher and half lower.

When other forms of compensation are included, such as stock options, benefits and other forms of long-term compensation, the median increase was 23.5 percent over that time.

The median increase in Washington area wages during the same period was 8.9 percent, and the regional economy grew at about the same rate.

Of the 282 executives in the analysis, 216 received an increase in cash compensation, including 51 executives who enjoyed a raise of 50 percent or better over the past three years. Five had no change in cash pay, and 61 had a reduction. This latter group, overwhelmingly, received smaller bonuses in 2006 than in previous years or received outsized bonuses in 2003 that weren't subsequently matched.

Only one executive received a smaller salary in 2005 than in 2003: Gary B. Smith, chief executive of fiber-optics-gear maker Ciena Corp., volunteered a pay cut because of Ciena's poor performance over several years.

By contrast, of the 216 executives who got raises from 2003 to 2005, 27 work at companies whose shareholders lost value over that three-year period.

Lucian Bebchuk, a law professor at Harvard University and a longtime critic of executive compensation strategies, said such large and steady pay increases reflect a lack of "market-driven" behavior by boards of directors.

When boards of directors decide how much to increase an executive's pay, they aren't functioning like a shopper looking for the best eggplant at the best price at a farmers market or a corporate manager trying to set a payroll budget that relates to the company's earnings or revenue.

"There's no disincentive for a board to overpay an executive," Bebchuk said. "All they are trying to do is make their pay decision defensible, which is not the same as getting the best possible deal."

Boards of directors often use peer comparisons -- what a similarly titled executive is paid at a similar company -- to defend pay increases. Similar to using comparable sales when deciding what to ask for a home in a hot-selling neighborhood, peer comparisons lead to bigger increases in pay. Unlike home values, executive compensation never goes down, or at least it hasn't since the early 1990s.

"You can't really say what a CEO 'should' get paid because what we're looking at is not a market outcome," Bebchuk said. "In most price-setting environments the force of a market decides, but that's not happening here."

Starting from a list of more than 700 executives at Washington area companies, The Post culled the 282 executives who had not changed jobs since Jan. 1, 2003. The list includes all titled executives such as chief financial officers, general counsels and vice presidents, not just chief executives.

In every public company proxy statement, the board of directors lays out in varying detail why it paid executives what it did the previous year.

Yet it is often not the compensation discussion in the proxy that explains why a certain executive gets a raise. Executive employment contracts -- which usually range from one to three years -- often guarantee raises in salary or set a "minimum" bonus. As opposed to stock options, restricted stock and other forms of long-term compensation -- which are meant to motivate future performance -- salary and bonus are the means by which boards of directors most often reward performance.

Take the example of Scott R. Royster, the chief financial officer of Radio One Inc., the Lanham owner of radio stations. Royster's contract guarantees him a 5 percent salary raise each year he's employed. Further, the contract calls for a "retention bonus" of $750,000 for staying with the company through the end of 2004. He was paid that bonus last year, bringing his total cash pay increase to 170.4 percent from 2003 to 2006. Radio One's stockholders lost 29.8 percent of their investment during that period.

Royster will receive a $7 million retention bonus on Oct. 18, 2010, if he sticks around until then. If he quits earlier, he gets a pro rata portion of the retention bonus.

Royster pointed out that the $750,000 retention bonus was part of the contract he signed in 2000 and was paid by the company, so he in turn could pay back a $750,000, interest-free loan from the company five years ago.

"I look at it as having been earned over five years," Royster said of the retention bonus.

Similarly, his $7 million retention bonus in 2010 is tied to a $7 million interest-bearing loan the company made him in 2000 to purchase stock in Radio One.

General Dynamics Corp. chief executive Nicholas D. Chabraja, whose cash pay increased 19 percent since 2003, to $4.3 million, signed a 2004 employment agreement that looks forward to retirement. In addition to guaranteeing him a "minimum" annual salary of $1.25 million until he retires, the Falls Church defense and aeronautics company agreed to give him 500 hours of flight time in a company-owned jet for 10 years after retirement, buy his Virginia home, pay his moving expenses, and provide an office and secretary for his personal use. He will get all this regardless of how General Dynamics performs. The company had a three-year shareholder return of 50.6 percent through 2005.

When ranking cash pay increases, executives at financial services companies tend to be at both the top and bottom of the range. In general, executives in that industry -- including banks, investment banks, credit card companies and in some cases real estate investment companies -- are judged by how much money they make for shareholders. When such a company has a good year, executive pay soars. If profit drops, so does pay.

At Arlington investment bank Friedman, Billings, Ramsey Group Inc., chief executive Eric F. Billings made less than many of the people who work for him in 2005, because huge losses in the firm's mortgage investment portfolio last year led to a $171 million loss for the company overall.

Billings earned the same annual salary of $480,000 from 2003 to 2005. But after receiving more than $18 million in bonuses in 2003 and 2004, he didn't receive a bonus in 2005. FBR's board did award Billings 125,000 shares of restricted stock in July 2005, which at the time was worth $1.6 million.

At business lender CapitalSource Inc., chief executive John K. Delaney went without a bonus in 2005, after receiving a total of $4.2 million from the previous two years. Last month Delaney signed a new five-year employment agreement that requires the company to grant him $100,000 a quarter in restricted stock in lieu of a salary. It also grants him options on 7 million shares that, assuming the stock appreciates at 5 percent over the next 10 years, will be worth more than $104 million. In addition, Delaney, a major shareholder in CapitalSource, received more than $18 million in dividends earlier this year.

Then there's the "because we like him" method of executive pay. Burton J. Reiner, the president for 35 years of real estate company Bresler & Reiner Inc., retired in March 2005.

The company's board granted him a one-time cash payout of $1 million "in recognition of his service to the company."

"This was a supplemental payment for Burt Reiner's 30-plus years of service with the public company and its predecessor," said chief executive and president Sidney M. Bresler.

Also, the company will pay the 77-year-old Reiner and his wife full medical, dental and vision benefits for the rest of their lives, a cost the company estimated at $330,000. From 2001 until his retirement, Reiner was paid more than $1.9 million in cash as president, not including the $1 million special payment.

At Allied, Walton cites several reasons for why his big raises in the past two years are not exorbitant, most of which are echoed by Allied's board in its annual proxy.

Allied is a lender to and investor in mid-size companies. In the three-year period ended Dec. 31, Allied's return to shareholders -- the increase in the price of Allied's stock plus its hefty dividend payments -- has been 75 percent. The realized gains on its investments last year were $273.5 million. Much of that was attributable to the strategic decision to sell its large real estate loan portfolio for a gain of $216 million.

Walton said that, relative to his peers in the financial services industry, he's not overpaid. He said New York investment bank Goldman Sachs Group Inc. pays its employees on average about $521,000 a year. Allied pays $598,000, "but our returns are better." He also said that were Allied a private partnership managing investors' money, much like a private equity firm, his take of Allied's gains in the past three years would be much higher than his current compensation.

"Mind you, I'm not complaining," he said. "I'm well paid. But you only earn that much if you produce results."



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