The Region's Highest-Paid Executives
Salaries, Bonuses Increased in 2003 After 2 Down Years

By David S. Hilzenrath
Washington Post Staff Writer
Monday, August 16, 2004; Page E01

Pay for the Washington area's top executives rose significantly last year, reversing the downward trend that set in with the recession in 2001.

The median salary and bonus for the 100 highest-paid executives rose 15 percent to almost $1.5 million in 2003 after declining by half in 2002 and 19 percent in 2001, according to a Washington Post survey.

The estimated value of the typical stock option grant rose by a third to $2.8 million after declining by 41 percent in 2002 and 20 percent in 2001, the survey found.

Nationally, some indicators of pay for top executives rose too. A study by Mercer Human Resource Consulting of 350 of the largest U.S. firms found that the median salary and bonus for chief executives rose 7.2 percent to $2.1 million. But the median salary, bonus and long-term compensation for chief executives, including options, fell 4 percent to $6.2 million.

The local increases came as company earnings increased significantly. The median profit for public companies in the Washington area nearly tripled in 2003 and increased by more than six times in 2002.

But both cash and stock option compensation remained far short of their levels in 2000, when the stock market peaked and the dot-com bubble burst. The median cash compensation -- salary plus bonus -- last year was less than half the $3.2 million median in 2000 for the 100 highest-paid executives. The median option grant, valued by assuming 5 percent growth in the exercise price compounded over the life of the option, was down almost $1.7 million from the $4.5 million median at the market's height.

Still, compared to the average wage earner, Washington's top executives did very well. Wages for U.S. workers in private industry rose only 2.9 percent last year, to a full-time national average of $40,745, according to the Bureau of Economic Analysis.

Some of the biggest earners in the Washington area presided over soaring stock prices and profits, while others were rewarded despite lackluster results.

That is still the case nationwide, too, experts said. "Despite the substantial pressure on companies to change, and despite the widespread recognition that things should change, there has been far too little change in the compensation landscape," said Lucian A. Bebchuk, director of Harvard Law School's program on corporate governance.

For the second year in a row, the top two executives at the Arlington-based investment bank Friedman, Billings, Ramsey Group Inc. -- Emanuel J. Friedman and Eric F. Billings -- led the list in total cash received with almost $9.5 million each.

Friedman and Billings, who are co-chairmen and co-chief executives, each received almost $9 million of their pay in bonuses pegged to profitability as the company gave investors a 170.5 percent total return on the stock, counting appreciation and dividends. FBR's chiefs could have received an additional $2.1 million each in bonuses last year but declined to accept it, according to a company report.

The median total return on local stocks last year was 50 percent, according to Bloomberg LP. For the 30 stocks in the Dow Jones average, it was almost 33 percent.

Ranked third by cash pay was Jeffrey J. Steiner, chairman and chief executive of Fairchild Corp., who was paid almost $7.8 million in cash. Fairchild, a distributor of aircraft parts, delivered a return on its stock of 27.9 percent for investors during its fiscal year ended June 30, 2003, or better than double the 11.7 percent median return for other local companies during that period.

A Friedman, Billings, Ramsey executive vice president, James R. Tonkel Jr., ranked fourth with $5.3 million in cash.

No. 5 in cash compensation was Franklin D. Raines, chairman and chief executive of Fannie Mae, the federally chartered mortgage company. Raines received $5.3 million in cash while Fannie, which invests in and packages mortgages for other investors, delivered a return of 19.6 percent last year on its stock, below the median 50 percent for local companies.

Because of its government sponsorship, Fannie has major advantages in the business arena, including the ability to borrow money relatively cheaply, according to government analysts.

While cash is easy to count, other components of executive compensation are harder to quantify, making it difficult to say who earned the most overall. For example, stock options give recipients the right to buy shares in the future at a set price. For every dollar the company's stock climbs above that price, the potential gain from the option increases by a dollar. But that value exists only on paper until the option vests and the executive cashes it in.

To compare executives by total compensation, The Post estimated the value of stock options based on an assumption that all stocks in the survey will rise 5 percent compounded annually over the life of the option. Companies are allowed to use 5 and 10 percent assumptions or a usually more conservative method called Black-Scholes when reporting compensation to the Securities and Exchange Commission. The Post uses the 5 percent valuation because companies use varying or undisclosed assumptions when they use the Black-Scholes model.

Danaher Corp.'s president and chief executive, H. Lawrence Culp Jr., had the highest total compensation with an estimated $57.5 million. Of that, $26.5 million represented the potential value of stock options and $27.3 million was in restricted stock. Culp could take possession of the restricted stock in 2010 if certain conditions are met.

The total was an 1,800-percent raise for Culp, who was No. 69 a year earlier and was promoted to his position in 2001. Danaher, founded by brothers Steven and Mitchell Rales, makes industrial controls and tools. The company delivered a healthy return on its stock of 39.8 percent last year, higher than the Dow Jones industrial average stocks but lower than the local median. By the end of the year, the paper value of Culp's restricted stock award had risen from $27.3 million to $35.7 million, Danaher reported.

Second in total compensation was Albert L. Lord, chief executive and vice chairman of SLM Corp., with $41.8 million, of which $33.2 million was the estimated value of stock options. Lord led the list in 2002. Like Fannie Mae, SLM, also known as Sallie Mae, is chartered by the government. The company, which services, collects and invests in federally insured student loans, has been in the process of diversifying and privatizing itself. The stock returned 10.5 percent last year.

Lord was followed by mobile phone company Nextel Communications Inc. chief executive Timothy M. Donahue with $29.4 million (total return 142.9 percent), SLM Chief Operating Officer Thomas J. Fitzpatrick with $27.8 million and Gannett Co. chairman and chief executive Douglas H. McCorkindale with $26.2 million (total return 25.8 percent.)

The ranks of the highest paid remained overwhelmingly male last year. Only two of the top 100 were women, Catherine G. West, president of the U.S. card unit of credit card company Capital One Financial Corp., and Marianne M. Keler, executive vice president of SLM.

Along with salary, bonuses, stock, and options, executives were rewarded with a variety of perquisites. Some were also reimbursed for the taxes they owed on those perks. And some were paid to hire personal financial advisers to help them manage their millions, including their personal income taxes.

For example, Culp's pay included $136,529 for Danaher's partial forgiveness of an interest-free $500,000 loan and $100,378 to reimburse Culp for taxes he owed on that forgiven debt.

McCorkindale of Gannett, the nation's largest newspaper chain, received $38,000 for legal services, and $33,239 of reimbursement for taxes on perquisites. Fannie Mae's Raines received $37,548 for tax counseling and financial planning services. He also was granted "personal use of company transportation" worth $196,852, the company reported. That included use of jets chartered by the company.

Some of the area's largest public companies didn't have any executives on the list of the 100 most highly compensated by total compensation. Those included cement-maker LaFarge North America Inc., management consultant BearingPoint Inc., The Washington Post Co., electric utility Pepco Holdings Inc. and gas utility WGL Holdings Inc.

Several companies had five or more executives among the top 100, including Nextel, Fannie Mae, Gannett, defense contractor Lockheed Martin Corp., biotech company Medimmune Inc., hotelier Marriott International Inc., FBR and stereo-maker Harman International Industries Inc.

Nationally, there has been a shift away from stock options and the "mega grants" that gained notoriety during the last bull market and the corporate scandals that followed, said Charles A. Peck, a compensation specialist at the Conference Board, a research group funded primarily by businesses. Partly because stock options came to be seen as encouraging earnings manipulation, firms have been giving greater emphasis to bonuses, restricted stock awards and long-term incentive plans that typically pay in stock, he said.

Ira T. Kay of Watson Wyatt & Co., a compensation consultant to corporations, said he observed a big decline in the value and number of stock options granted during 2003.

But options still seem to flourish among the top 100 local executives. Eleven executives at seven companies received option grants last year estimated to be worth more than $10 million, and 125 received grants worth more than $1 million.

In 2003, as in 2002, options accounted for just over half of the median estimated total compensation.