By David S. Hilzenrath
Washington Post Staff Writer
Monday, July 16, 2007; D01

The chairman and chief executive of credit card issuer Capital One Financial, Richard D. Fairbank, was the most highly paid executive at a Washington area public company last year with total compensation of $37.4 million.

Or was he?

The perennially complex exercise of measuring executive compensation became much more contentious this year as new disclosure rules scrambled the way companies tally the numbers. Companies such as Capital One say the totals they were required to report in public filings don't really describe what their executives took home last year.

The disclosures, which regulators mandated in response to the growing outcry about executive pay, shed light on previously murky forms of compensation such as pensions, perks and golden parachutes, giving a fuller picture of boardroom rewards.

For the first time, it became clear how much executives stand to receive in retirement, a major component of many pay packages. For example, former Gannett chairman Douglas H. McCorkindale, who retired in mid-2006 after a 35-year career at the newspaper company, amassed pension plans worth about $25 million on top of $21.2 million in deferred compensation. All but about $1.7 million of his pension money was accumulated through a special plan for executives rather than the standard employee plan.

It also became clearer how lucrative it can be to serve on a corporate board -- and how much incentive outside directors have to hold onto their seats. At defense contractor Lockheed Martin, some board members earned about $580,000 last year including stock appreciation -- but not counting the $1 million the company donated to their favorite charities.

For many executives, annual pay paled beside the amounts they had the potential to receive if they were fired. Sprint Nextel reported that if chairman and chief executive Gary D. Forsee had been forced out after a hypothetical buyout of the company, he could have received a parachute worth $73.8 million. In addition, the company would have reimbursed him for $16.1 million in taxes.

As in past years, the privileges of being a top executive could be myriad: use of a company car, club memberships, tickets to entertainment events, home security systems, personal access to the corporate jet, hotel spa services, pension credit for more years of service than they actually worked, dividends on stock awards that haven't vested, guaranteed returns on retirement savings and payments for financial planners to help manage their money.

Shareholders paid for accountants to prepare executives' tax returns -- and then they helped pay the taxes, corporate filings show.

Coventry Health Care, a managed care company based in Bethesda, provided chairman and former chief executive Allen F. Wise $20,655 for an auto lease, $563,796 for other transportation such as aircraft costs and trip catering, and $77,468 to cover taxes on perks.

Wise's compensation "was developed to ensure a smooth transition" when he gave up the job of chief executive in January 2005 and became chairman, Coventry Vice President Drew Asher said by e-mail, adding that Wise will no longer receive those perks after this year.

In the bright light of disclosure, some companies were reconsidering compensation policies. Lockheed said it will give executives bigger salaries in place of certain perks -- an extra $40,000 for chairman and chief executive Robert J. Stevens -- and no longer will allow outside directors to steer million-dollar charitable contributions.

However, by not requiring companies to restate past years' compensation to conform to the new disclosure system, the Securities and Exchange Commission clouded the analysis of historical trends -- for example, measuring how pay last year compared with pay the year before. SEC Chairman Christopher Cox said the agency didn't want to saddle companies with an unworkable burden.

In requiring companies to disclose a comprehensive total for annual compensation -- the centerpiece of the new disclosures -- the SEC created more confusion than clarity, some pay analysts and corporate spokesmen say.

No one illustrated the problem more vividly than Capital One's Fairbank, who receives neither a salary nor a cash bonus and has become one of the region's richest executives through gains on stock options.

The pay totals shown in the McLean company's filings this year -- and reflected in the charts accompanying this story -- are based on an accounting formula that generally spreads the value of stock and option awards over their multi-year vesting periods.

By that measure, Fairbank's stock and option awards last year were worth $37.3 million.

But most of the $37.3 million related to grants made in 2003, 2004 and 2005. The grant Fairbank was awarded in 2006 had an estimated value of $18 million, only a portion of which is included in the 2006 total.

That $18 million was the intended value of Fairbank's annual compensation, Capital One spokeswoman Julie Rakes said by e-mail.

Based on stock and options actually awarded last year, Danaher chief executive H. Lawrence Culp Jr.'s compensation would have totaled $46.3 million, putting him ahead of Fairbank instead of fourth with total compensation of $19.6 million.

Even then, comparisons could be flawed because the ultimate value of a newly awarded option depends on unpredictable factors such as future movements in a company's stock price. Though companies use a standard formula to estimate the value, they plug in their own assumptions about such factors as how long executives will wait to exercise the options.

Options give employees the right to buy shares at a set price, enabling them to sell at a profit when shares trade for more on the open market.

When an executive exercises an option, valuing it becomes straightforward, but gains from cashing in options are not included in the annual totals.

Exercising old options produced major gains for many executives last year, such as: $21.3 million for Culp, $21.5 million for General Dynamics chairman and chief executive Nicholas D. Chabraja, $32.3 million for Marriott International chairman and chief executive J.W. Marriott Jr. and $59.4 million for Dwight C. Schar, chairman of homebuilder NVR.

By that measure, they eclipsed Capital One's Fairbank, who exercised no options in 2006. (Fairbank gained $475.2 million from exercising options over the preceding six years, including $249.3 million in 2005. So far this year, he has exercised options for a gain of $29.3 million, according to data from Thomson Financial.)

Also included in the SEC's new definition of total compensation were increases in the estimated present value of pension plans and deferred compensation accounts, which can be affected by such factors as fluctuations in interest rates. At some companies, changes in the pension estimates totaled millions of dollars -- for example, $5.2 million for Martine A. Rothblatt of United Therapeutics, which set up its executive retirement plan last year; $4.1 million for Craig A. Dubow of Gannett, who took on the added title of chairman last year; $2.9 million for Chabraja of General Dynamics, and $2.5 million for Dennis R. Wraase of Pepco.

Shareholders focusing on different aspects of the pay disclosures may feel as though they're touching different parts of the proverbial elephant, said Patrick McGurn, executive vice president of Institutional Shareholder Services.

"The one thing you know is, it's an elephant."

By Cecilia Kang
Washington Post Staff Writer
Monday, July 16, 2007; D05

Gone perhaps are the days when a corporate tycoon could put a $6,000 shower curtain on the company tab. But being an executive in the Washington area last year still had its fringe benefits.

From personal use of the company jet to spa treatments to chauffeurs, local business leaders last year were awarded a wide range of extras to lure them to the top ranks of their companies and to keep them.

In some cases, those extras added hundreds of thousands of dollars to compensation packages. Yet with new rules that force companies to provide more details on perks than ever before, compensation experts say companies will have a harder time offering the golf club memberships and generous tax reimbursements that have been standard benefits for executives.

Perquisites are typically a small part of an executive's total pay and compensation package, according to Don Lindner, an expert on executive compensation at World at Work, a nonprofit association for compensation and benefits specialists. But with greater shareholder scrutiny, companies have become more wary of offering perks that could raise red flags. Lockheed Martin, for example, has changed how it approaches compensation, giving executives bigger salaries instead of some fringe benefits, and others say they are continually reevaluating their executive benefits.

"Benefits are going to get toned down as companies will have to justify how the benefits they offer are a business necessity," Lindner said.

Many companies say fringe benefits serve legitimate business needs. For example, paying for financial planners, family travel expenses and other personal services can free a busy chief executive to focus on businesses responsibilities, rather than worrying about demands at home, they say.

Here's a sample of the kinds of extra rewards given to top executives in the Washington region.

Say you've got a house in Michigan and another in Florida and work Monday through Friday in Chantilly. How do you make the commute? If you are James J. Leto, president and chief executive of government technology provider GTSI, you spend the week in the Washington area in a $43,750-a-year rented apartment and fly home on the weekends for another $43,750 a year.

It's a price some companies are willing to pay to attract and retain executives who aren't willing to move.

Human Genome Sciences chief executive H. Thomas Watkins was reimbursed $21,712 last year for travel between Chicago and the Rockville drug company. Orbital Sciences President James R. Thompson lives in Huntsville, Ala., but commutes between the space-and-launch services company's Dulles headquarters and Huntsville offices, costing the company $81,280 for airfare, lodging, car rental and meals.

Few other luxuries speak of a person's importance in the business food chain as well as the corporate jet. For some of Washington's business leaders, the privilege of private jet travel extends to personal use.

Top executives of Sprint Nextel were allowed to use the corporate plane for nonbusiness travel. Chief executive Gary D. Forsee racked up $192,530 worth of personal travel expenses on the company jet. Sprint Nextel said that for security reasons, Forsee is required by the company to fly on the corporate plane for all travel, including nonbusiness trips.

Compensation experts said personal use of the corporate jet may be argued as a necessary business expense for the security of its executives and to allow the leader to quickly move between multiple residences and work.

Paul Hodgson, a senior research associate at compensation analysis group Corporate Library, said companies around the country are rethinking personal jet use because it raises a red flag.

"The attitude now is that some of the highest-paid employees should not be provided with additional benefits beyond those of other employees," Hodgson said.

For the heads of Washington's largest companies, the exposure brought by their jobs calls for greater security, companies say. That means making sure their executives are protected at all times, even off the job.

Forsee secured his residences with $39,801 worth of equipment and services. Lockheed Martin chief executive Robert J. Stevens charged his company $64,483 for his home security system.

"Because executives are so high profile, security as a perquisite is absolutely justified as a business necessity," Lindner said.

Executives have to pay taxes for those corporate cars and on the value of other benefits. So with those benefits come the perk of tax gross-ups, or payment of taxes on benefits.

Coventry Health Care paid taxes on perks for several of its executives, including $66,146 for chief executive Dale B. Wolf.

A frequent feature of executive benefits packages, payment of taxes on perks will be subject to closer scrutiny, Lindner predicted.

"If you can't justify how it helps the business it will take a hit," he said.

From golf greens to mahogany-and-brass dining rooms, membership in exclusive clubs is a common perk of being a business leader. Some companies reimburse the member fees their executives pay to have a place to relax and socialize.

At Capital One Financial in McLean, David R. Lawson, a division president, was awarded $8,222 for his country club membership. J. Herbert Boydstun, an executive vice president at Capital One, was given $9,031 for country club fees.

Some argue that business is often conducted on the golf course, where executives foster relationships with clients and potential partners. Yet compensation experts say club memberships could be another benefit that may not cost a company much but may become harder to explain to shareholders.

By David S. Hilzenrath
Washington Post Staff Writer
Monday, July 16, 2007; D06

This year's executive pay reports are the first since the government mandated clearer disclosure, and even some people responsible for setting compensation have been surprised at what they show.

The new disclosures were intended to give investors more and better information about executive rewards, partly by illuminating retirement benefits and other types of pay that became known as "stealth compensation" because their value wasn't spelled out.

"The owners of an enterprise are entitled to full knowledge of how much they're paying their employees," said Securities and Exchange Commission Chairman Christopher Cox, whose agency drafted the new requirements. "It's not really disclosure if the investor has to sort it all out and piece it together."

Among investors, the reviews are largely favorable.

"Overall, investors are getting a much clearer picture than they had a year ago," said Amy Borrus, deputy director of the Council of Institutional Investors.

In corporate boardrooms, there have been some "aha moments" as directors read the expanded disclosures and saw just how much their executives stood to collect, said Ira Kay of the Washington consulting firm Watson Wyatt, who advises boards on compensation.

"It was 'Wow, that's a lot of money,' " he said.

Kay was referring specifically to the size of the golden parachutes executives had the potential to receive. But the reaction showed how much clearer some aspects of compensation have become under the new system -- and how opaque they had been.

Where companies previously described the often complex formulas and contractual terms that determine how much executives could receive in severance benefits, the new disclosures show the potential size of the parachute -- for example, as much as $126.9 million for H. Lawrence Culp Jr., chief executive of Danaher, a District-based manufacturer.

Where companies previously disclosed big-ticket perks, like six-figure sums for taking the corporate jet on vacations, the threshold for disclosure of perks was lowered. This year, NeuStar, a Sterling communications firm, even noted that, along with golf and travel benefits, chairman and chief executive Jeffrey E. Ganek received "periodicals and other reading material."

Still, measured against the stated goal of making pay more transparent, the SEC's new rules haven't been a complete success. Cox has publicly complained that some companies' disclosures have been "really horrid."

The sections where the SEC asked companies to provide plain-English descriptions of their compensation policies are often filled with gobbledygook, some readers say.

Most "are incomprehensible I would imagine to most shareholders," said Paul Hodgson, an analyst at the Corporate Library.

Almost half of the large companies Wyatt studied early in the disclosure season chose not to reveal how high they set the bar for bonuses and other forms of incentive pay. The SEC allowed them to omit specific performance goals, such as earnings targets, if they regarded them as competitively sensitive.

In some areas, the SEC deliberately made the disclosures less revealing -- for example, when companies engage in potential conflicts of interest by doing business with their own officers, directors or members of insiders' families. The SEC raised the threshold for disclosure of so-called related party transactions to $120,000, from $60,000. The threshold had last been revised in 1984, and the change was meant to adjust for inflation, Cox said.

As a result of the change, a board member's son or daughter could be hired by the company at a salary of $115,000 "and not a single investor would know of that potential conflict and the fact that it may be undermining the director's independence," said Daniel Pedrotty, who scrutinizes executive pay for the AFL-CIO.

Meanwhile, some of the most eye-popping numbers have disappeared from the disclosures.

In past years, companies were required to report the value of executives' outstanding stock options -- showing, for example, that William W. McGuire, chairman and chief executive of UnitedHealth Group, ended 2005 with options he could have cashed in at a gain of $1.6 billion, plus $174.9 million worth of options that had not yet vested. McGuire later stepped down after a company investigation found irregularities in how the Minneapolis health insurer dispensed options.

This year, raw data such as the exercise price for each batch of options is disclosed, but investors have to crunch the numbers for themselves.

The year-end values were omitted to make room for other information, said Paula Dubberly of the SEC's division of corporation finance.

One controversial aspect of the new system involves a last-minute change the SEC adopted in December, without a public vote. In computing total annual compensation, the SEC decreed, companies should spread the value of a stock or option grant over its multiyear vesting period instead of counting the full value of the grant in the year in which it was made.

Critics suspected that the SEC's approach would enable companies to report lower pay totals, but the SEC says it hasn't worked out that way. Chief executives at 62 of the 100 largest companies reported equal or higher total compensation using the approach prescribed by the SEC, according to the agency.

The method the SEC adopted corresponds to how companies account for the cost of the grants in their income statements, and booking the entire value of a grant in a single year while it matures over multiple years would be like "squaring the circle," Cox said.

The SEC is preparing to introduce new features on its Web site that will allow the public to view total pay using either method.

An open question is how much the disclosures will influence behavior.

Once cherished as status symbols, perks like club memberships had already become symbols of excess and easy targets for angry shareholders. Though their cost can be small in relation to total compensation, they were beginning to wither at some companies even before the new disclosures came along, compensation consultants say.

Far costlier items -- such as newly bared severance packages that reimburse executives for millions of dollars in taxes -- are embedded in executive employment contracts and are unlikely to change until the contracts expire or the executives move on, consultants say.