Return to Virginia Business - October 2002

Related links:
— Executive compensation chart
— Rethinking executive pay isn't over yet

by John Rubino

What a difference a couple of years can make. For most of the 1990s, Virginia’s highest-paid executives tended to be the founders of New Economy shooting stars like AOL, Nextel and webMethods. But with the bursting of the tech bubble, yesterday’s tech icons are either gone or in retreat, and the really big bucks are now flowing into companies that — one way or another — help Americans spend what they don’t yet have. It’s scary but true: These days the real action is in credit cards, student loans and home mortgages.

The biggest winner by far in 2001 was Richard Fairbank, CEO of Falls Church-based Capital One Financial Corp. A pioneer in the use of data mining to decide who gets credit on what terms, Capital One has been gobbling market share for most of the past decade. And Fairbank timed a series of big stock sales beautifully, netting $142 million in early 2001. Executive Vice President John Finneran Jr. did same thing, on a smaller scale, cashing out to the tune of $15 million.
Besides pushing the envelope in data mining, Capital One is conducting one of the more audacious experiments in executive pay. In lieu of salary or bonus, Fairbank and President Nigel Morris get options — lots of them. The options vest over the next three to five years, and will have value only if Capital One’s stock rises steadily from here. The goal: “Long-term pay for long-term performance,” says Capital One spokesman Hamilton Holloway. In early September, Capital One’s stock was down by nearly half from its 2001 high, following an earnings restatement to better account for some higher-risk loans. So barring a sharp turnaround by yearend, don’t expect to see Fairbank or Morris atop next year’s list. Which is exactly the way pay for performance is supposed to work.

Also striking while the iron was hot were Albert Lord and Thomas Fitzpatrick, CEO and president, respectively, of Reston-based SLM Corp., otherwise known as Sallie Mae. The largest player in the student loan market, it’s somewhat insulated from the business cycle, making it a favorite of money managers. Lord and Fitzpatrick earned nearly $46 million by selling company stock in 2001, near SLM’s all-time high. With the share price even higher this year, expect it to be well represented on our 2003 list.

Federal Home Loan Mortgage (Freddie Mac), meanwhile, is both a cause and beneficiary of the red-hot housing market. A “quasi-governmental” organization that buys mortgage loans from banks and packages them into high-grade bonds, its business is booming and its share price is up about 80 percent from its 2000 low. Vice presidents Gregory Parseghian and David Glenn each sold enough stock to land them in the top 10.

If the mortgage market is strong, it follows that lots of new homes are going up, and McLean-based NVR Inc. is doing much of the building. Its stock price has more than doubled in the past year, allowing CEO Dwight Schar and Executive Vice President Paul Saville to cash out to the tune of $26 million. Expect Schar and Saville to top next year’s list, since, according to documents filed with the SEC, they sold stock worth over $80 million during 2002’s first seven months.

And don’t be surprised if the total is a lot higher when all is said and done. NVR gets about half its earnings from the Baltimore/Washington market, “and the increase in government spending [post 9/11] has kept those markets much healthier than most. New home prices are rising and I expect that to continue for some time,” says Legg Mason analyst David Weaver.

The only member of this year’s top 10 list whose company doesn’t lend money or build houses is Douglas McCorkindale, CEO of the McLean-based Gannett newspaper and media conglomerate. The $11 million he earned in salary, bonus and stock gains was a reward for something rare in the media world: self-control. During the 1990s, when many media companies were blowing billions on quixotic attempts to build media superstores or ring the world with fiber, Gannett stuck to its knitting, amassing and running an admirably Old Economy stable of newspapers and TV stations. Now, with icons like WorldCom and AOL Time Warner suffering to various degrees, Gannett boasts rising earnings and a stable share price.

The award for the biggest salary and bonus package — $6.8 million — goes to Joseph W. Luter III, CEO of Smithfield-based Smithfield Foods, a meat processor whose earnings set records in 2001. But with a glut of hogs sending Smithfield’s earnings and stock price down dramatically so far in 2002, don’t expect to see Luter near the top of next year’s list.

Overall, the average pay package fell slightly, to about $5.1 million, continuing a decline that began in 2000. Even so, it’s still more than twice the level of the mid-1990s, and with the stock market down and corporate pay under a microscope (see the accompanying article), expect the trend towards smaller paychecks — and a clearer link to performance — to continue for a while.

Return to Virginia Business - October 2002