Turnover at the top
2005 saw lucrative deals for departing and arriving CEOs

by Brett Lieberman
for Virginia Business
October 2006

It still pays to be the boss or to retire at the top of the corporate ladder. That point was apparent in Virginia last year as a merry-go-round of executives rode into the CEO suite to replace many longtime leaders who stepped down from the day-to-day whirl of the company. In fact, CEO titles changed at 13 of the 33 large public companies surveyed by Virginia Business.

The turnover made it hard to spot year-to-year trends in executive pay. Still, the issue continues to sizzle on the nation’s front-burner as shareholders decry the widening gulf between the millions earned by CEOs compared to the wages of average workers. Plus, Congress is threatening action in response to an unfolding stock options scandal. Federal regulators are investigating more than 100 companies (none with a Virginia address so far) for allegedly backdating options to boost executive pay and save on taxes.

To prevent future stock option abuses, legislators may do away with a provision that limits tax deductability on top executive salaries to $1 million, unless the pay meets performance-based requirements.

In Virginia, the exercise of stock option grants enriched several CEOs last year. At Capital One Financial Corp., Richard D. Fairbank took home $249.2 million from such grants, making him the highest-paid CEO in the state for the second year in a row. The gains came on options issued in 1995 that would have expired in 2005. Over this 10-year period, Capital One outperformed some other financial services companies with annualized shareholder return 24.6 percent according to the company’s 2006 proxy. Fairbank, 55, hasn’t taken a salary or bonus in years, opting instead to be paid in performance-based stock options.

The No. 2 spot went to Dwight C. Schar, former CEO and continuing chairman at McLean-based NVR Inc. He earned a total of $63.2 million in fiscal 2005, with $61.2 million of it coming from stock option gains. Schar, 64, stepped down as CEO of the home building and mortgage banking company in June 2005 after a record year, with revenues of $5.1 billion, up 22 percent from 2004.

By staying on as chairman (through Jan. 1, 2011 according to NVR’s most recent proxy), Schar could receive a minimum base salary of $2 million a year and an annual bonus of up to 100 percent of the base salary. At his request, however, the company dropped Schar’s salary by $500,000 (or 25 percent) on Jan. 1 of this year, to reflect the change in his title.

As executives reach retirement, some see their earnings peak. After serving as CEO and president since 1992, Norfolk Southern’s David R. Goode retired last November and relinquished his position as chairman in February. During the last two years at the helm, he received a bonus double his $1 million salary, plus healthy stock options gains — enough to rank Goode the fifth highest paid Virginia CEO in 2005. As part of his retirement agreement, Goode, 65, agreed to provide consulting services for five years, which entitles him to enhanced retirement benefits.

In addition, the Norfolk-based railroad company named its 12-story Atlanta office building after Goode. He oversaw Norfolk Southern’s merger with Conrail and through some rocky financial periods, before leaving the company in good financial shape.

Meanwhile, new CEO Wick Moorman, 54, got a boost in annual salary from $650,000 in 2005 to $750,000 at the beginning of 2006 in recognition of his promotion. That puts his base salary below the 25th percentile of salaries paid to CEOs of other U. S. corporations of comparable size, says the company’s proxy. But it’s double what Moorman was earning in 2004. Moving up to CEO also netted a nice increase for Theodore L. Chandler Jr. at Richmond-based LandAmerica Financial. Chandler took over in January of 2005, and earned a salary of $575,000 and a $1.1 million bonus last year — 81 percent more than his 2004 earnings of a $400,000 salary and a $551,000 bonus.

Coal fortunes made Dan L. Blankenship the third-highest-paid CEO last year. The president, CEO and chairman of Richmond-based Massey Energy Co. took home the fattest bonus in 2005: $11.4 million. The bulk of it, $10 million, was a deferred incentive bonus that vested at the end of 2005. With high energy prices driving up the demand and price of coal, Massey’s revenue increased last year as well.

Combined with $1 million in salary, Blankenship earned $12.4 million, more than a 600 percent increase over his 2004 salary/bonus package of $1.6 million. Blankenship, 56, also received $15 million in a long-term incentive payment last year for a total of $28.2 million.

The largesse came during a year when the company saw historically high coal prices, but reported a $101.6 million loss (or $1.33 a share) related to a debt repurchase and exchange offer. In 2006, the year got off to a rough start with the death of two miners in January in a beltline fire in Logan, W. Va. Then this spring a dissatisfied shareholder, critical of Blankenship’s salary, perks and other management issues, gained two seats on Massey’s board.

On the whole, executive pay grew twice as fast as the wages and benefits of U.S. workers last year. Yet more and more of the big paychecks are “at risk,” tied to performance benchmarks. “The move has been to true pay for performance,” says Bruce Ellig, a New York-based human resources consultant and former chairman of the Society for Human Resource Management, who advises companies on compensation deals. “I don’t know that we’re there yet, but it’s better.”

Companies are moving away from contracts that offer stock options and other incentives with few strings attached. Instead, they are moving toward performance shares that tie bonuses and long-term payouts to measurable benchmarks such as profits, earnings per share, return on assets and, in a few cases, stock performance.

Actually, CEO pay slowed down in 2005, according to one well-known survey. Direct compensation — salary plus bonus — rose 7.1 percent from 2004 to a median of $2.4 million last year, according to a Mercer Human Resource Consulting study of proxy filings at 350 large public companies. That boost exceeded the 3.6 percent climb in pay for white-collar staffers, said Mercer. Yet, it was far below the 14.5 percent bump in salaries and bonuses CEOs received a year earlier in 2004.

The more modest growth may mean that executives and compensation committees are finally paying attention to shareholder concerns about excessive pay. “The close alignment of pay and performance reflected in the 2005 Mercer survey numbers indicates that organizations are moving toward more responsible executive compensation,” Peter Chingos, a senior executive compensation consultant with Mercer, says in statement accompanying the report.

In Virginia, some executives saw a drop in pay last year. At Amerigroup, for instance, CEO Jeffrey L. McWaters received 67.6 percent less in salary and bonus, because he and other top executives weren’t awarded bonuses in 2005. Financially that was a tough year for the Virginia Beach company, which provides managed health care services to Medicaid patients for the public sector. Its stock price plummeted more than 40 percent in September of 2005 after the company said that it would post a third-quarter loss and not make expected earnings due to higher medical costs. The loss prompted shareholder lawsuits, alleging that the company and some of its senior officers misrepresented Amerigroup’s financial condition and inflated share prices. The suits have been consolidated into a class, and the company plans to fight the allegations in court.

Corporate boards are already going to greater lengths to provide more transparency and to explain compensation packages, particularly in light of upcoming changes in the law which will force them to do so. The emerging scandal about possible backdating may throw cold water on stock options as well. Ellig, author of “The Complete Guide to Executive Compensation,” and other experts say companies may shy away from options to avoid getting tangled in the mess, which could result in criminal charges as well as shareholder lawsuits.

Plus, options are becoming more expensive now that companies are forced to expense them immediately, a change that takes effect for fiscal 2006 reporting. “The biggest trend I see is the emergence of these long-term incentive programs. Where historically they were based on large option grants, they are moving away from them,” says Robert McHale, a senior partner in the Tysons Corner office of the Korn/Ferry consulting firm.

New disclosure rules proposed by the U.S. Security and Exchange Commission, which should take effect next year, are expected to have a profound impact on executive compensation and perks. Since companies will have to disclose details as small as car allowances, many perks may fall by the wayside. “They don’t stand the face of scrutiny. If you’re paying $10 million to your CEO, why can’t he pay for his travel and perks?” says Ellig.

Improved disclosure could make company directors and executives more responsive to shareholder and watchdog complaints. At Smithfield Foods annual meeting in August, a representative from a union retirement plan spoke in favor of a proposal to do away with stock options as part of the company’s structure for executive bonuses. He complained about the millions in bonuses outgoing CEO Joseph W. Luter III received in recent years — $9.8 million and $3.8 million during the last two fiscal years. The measure failed on a majority vote, but new CEO Larry Pope says the company will study the matter.

Looks like next year’s proxy season could provide for some interesting reading.

Biggest gainers in 2005

• Biggest bonus: $11.4 million, Dan Blankenship, Massey Energy
• Biggest annual salary: $2 million, Dwight Schar, former CEO, NVR
• Biggest stock option gains: $249.2 million, Richard D. Fairbank, Capital One
• Best cumulative five-year shareholder return: 548 percent, CACI International