For Many Top Executives,
It's Ask and You Shall Receive
By David S. Hilzenrath
Monday, June 27, 2005
Mired in bankruptcy reorganization, W.R. Grace & Co. agreed this year to pay newly installed chief executive Alfred E. Festa a $1.75 million "Chapter 11 emergence bonus" -- whether or not the chemical company emerges from Chapter 11, according to a report filed with the Securities and Exchange Commission.
General Dynamics Corp. promised last year that, if chairman and chief executive Nicholas D. Chabraja stays at the company through April 2008, he will be allowed to use corporate aircraft for up to 500 hours during his first decade of retirement. That would be on top of annual retirement pay projected at $2.1 million based on his salary and bonus last year, the defense contractor said in an SEC filing.
Coventry Health Care Inc., an HMO company, gave chairman and former chief executive Allen F. Wise a deal that includes as much as $12,000 for legal, tax and financial planning, an unspecified automobile allowance, 75 hours of personal airplane use and a "tax equalization bonus" to ensure that those other benefits entail "no net cost to him," according to a regulatory filing.
After the company signed that agreement, it reimbursed Wise for the legal fees he incurred negotiating it.
Despite increased scrutiny of executive compensation after a series of corporate scandals, the executive suite at many companies remains a charmed place in which boards not only reward executives with rich salaries and bonuses but also help them with such routine expenses as commuting to work and preparing their taxes.
They get signing bonuses for taking the job, retention bonuses for staying on the job and a continuing stream of retirement perks to ease them out of the job. They receive stock options to reward them if the stock price rises, and if the stock price falls, they can sometimes renegotiate the terms.
In the rarefied world of top executives, "the board basically gives the executive whatever he or she has the chutzpah to ask for," said Rakesh Khurana, an associate professor at Harvard Business School who teaches a course on corporate governance.
After the highly publicized accounting scandals at Enron Corp. and WorldCom Inc., "there was a period around 2001, 2002 when boards felt quite constrained in terms of executive pay and executive perks," said Randall Thomas, a law professor at Vanderbilt University who studies executive compensation. Now, he said, "It's not as hot a political topic," and boards feel free to give executives more.
None of the executives contacted for this article agreed to be interviewed. Some did not respond to interview requests.
Thomas, however, said top executives "are so sought after that they have enormous bargaining power," and "they're negotiating against the backdrop of what the market usually gives people in this position."
That leaves open the question: Why do highly paid executives even ask for perks they could easily afford?
"It's a sense of entitlement: I'm entitled to it. I'm putting so much time into the company," said William W. George, former chief executive of Medtronic Inc. and a member of the boards of companies including Goldman Sachs and Exxon Mobil. "Executives make a lot of money, so they ought to be able to pay for those things themselves. How far do you want to go? Groceries?"
Some of the perks and pay arrangements don't show up in the compensation tables that publicly traded companies are required to include in reports to the SEC. If they appear at all, it's in the footnotes and fine print, seemingly designed to reward executives more stealthily, said Jesse Fried, a law professor at the University of California, Berkeley, and the co-author of "Pay Without Performance: The Unfulfilled Promise of Executive Compensation."
Fried blames the insular nature of corporate boards for the proliferation of benefits. Current rules make it difficult for shareholders to compete with the slates of candidates that companies present for seats on their boards of directors. Until board elections are more easily contested, significant changes in executive compensation are unlikely, he said.
"It's like so many things in life: 'Oh, so-and-so gets it, I ought to get it. It's like keeping a star quarterback happy," said Joseph E. Bachelder, a lawyer who represents executives in compensation negotiations. "In many cases it would seem like sand in the gears for a director to raise his hand and object to the CEO getting a particular perquisite. No one wants to look like a leper over a relatively immaterial issue."
One executive who makes a point of accepting no salary or bonus and takes almost all of his compensation in stock options, had his company pay for professionals to help him manage his wealth. Richard D. Fairbank, chairman and chief executive of Capital One Financial Corp., last year gained $56.5 million from exercising stock options, and at the end of the year, his unexercised options were worth $560.2 million, the company reported.
Fairbank's $29.5 million pay package last year included $137,386 for "personal financial services," the company said in an SEC filing.
At Coventry Health Care, Dale B. Wolf, who rose to chief executive from chief financial officer in January, negotiated an employment contract granting him personal use of an airplane for 50 hours and reimbursing him for taxes on that benefit, the company reported in an SEC filing. He also receives the use of a leased car, which he will keep if he is fired without cause. Plus "all reasonable operating costs."
Based primarily on a grant of one million stock options, Wolf's pay package last year was worth an estimated $32.3 million, which placed him atop The Washington Post's annual ranking of total compensation.
As for Coventry's new chairman, after the company executed Wise's latest contract in September, "the Company paid Mr. Wise's legal fees and expenses arising in his representation in the preparation of the Agreement and in advising him of its consequences," Coventry reported.
Director John H. Austin, who was chairman of Coventry's board until the end of last year and chairman of the compensation committee until early November, declined to comment.
Lockheed Martin Corp. directors did a favor for Vance D. Coffman when he retired as chief executive by allowing him to keep options that had not vested.
"Generally, retirement before the first vesting date results in forfeiture of the award. Dr. Coffman's 2004 award was amended to permit continued vesting under the original award terms after his retirement as CEO," the company said in an SEC filing.
Coffman was granted 375,000 options last year with an estimated value of $11.6 million.
In a written response to questions, company spokesman Tom Jurkowsky said Lockheed's compensation committee allowed Coffman's options to continue vesting "in recognition of the fact that he was going to continue to serve as Chairman of the Board through April 2005."
Through that period, the compensation committee extended various perquisites for Coffman such as access to corporate aircraft for personal use, a country club membership and as much as $50,000 for moving expenses. After retiring from the board, he was entitled to office space, secretarial support, "computer connectivity" and security for his homes.
The chairman of the Lockheed Martin board's compensation committee, Gwendolyn S. King, who is president of a speechwriting and executive coaching service, did not return calls.
General Dynamics negotiated a new contract with Chabraja last year that obligates the company to buy his Virginia home after he retires.
Chabraja, who has been a General Dynamics executive since 1993, received about $340,000 in perks last year as part of his $13.7 million in total estimated compensation. The perks included about $270,000 for personal travel on company planes "as required by the Board to help ensure Mr. Chabraja's safety and accessibility," the company reported.
The chairman of the General Dynamics compensation committee, retired U.S. Army Gen. George A. Joulwan, said through a company spokesman that he declined to be interviewed.
Kendell Pease, a spokesman for the company, said that, as context for Chabraja's compensation, the company had delivered a 237 percent total return to shareholders over eight years, compared with 85 percent for the Standard & Poor's 500-stock index and 45 percent for S&P's aerospace and defense index.
At W.R. Grace, the post-retirement benefits for chairman and recently retired chief executive Paul J. Norris include moving expenses -- "grossed up to account for applicable income taxes" -- and compensation for any loss on the sale of his Maryland home, the company reported. The company estimated that moving and related expenses could be worth $440,000, adding that it didn't expect to have to cover any loss on the sale of Norris's home.
Norris received a retention bonus of $1,235,000 in each of the past two years. For 2003, the bonus was for staying on the job, but for 2004, half of it was pegged to the achievement of an earnings target, said company spokesman Greg Euston.
"The company decided that it was more appropriate to have some of that retention bonus at risk, and Mr. Norris supported that change," Euston said.
But the same philosophy did not apply to the "Chapter 11 emergence bonus" the company agreed to pay Festa, Norris's successor as chief executive.
Though the W.R. Grace board approved it, creditors in the bankruptcy proceeding objected to Festa's Chapter 11 emergence bonus because it "suggested that he was going to be taking the company out of Chapter 11," Euston said. "The creditors' committee objected, and . . . basically it was renamed a retention bonus."
Why would Grace pay its chief executive a bonus just for staying on the job?
"Because managing a [company in] Chapter 11 is more difficult than managing other companies," Euston said. "There's a very high degree of scrutiny from a very smart, intelligent group of lawyers and businesspeople in Chapter 11."
The chairman of the W.R. Grace compensation committee, former International Business Machines Corp. chairman and chief executive John F. Akers, declined to comment.
Companies also have been willing to rewrite the rules when things do not work out for their executives. At Broadwing Corp., a communications firm, the board's compensation committee changed the terms of 36,000 options awarded to general counsel Kim D. Larsen to increase their paper value by more than $360,000.
In a report to shareholders, the compensation committee said it saw the granting of stock options as a way "to tie executive officer compensation directly to Broadwing's long-term success and increases in stockholder value."
But in Larsen's case, the committee cited a different rationale, saying it was adjusting the terms "to provide competitive and balanced compensation as an appropriate retention incentive."
A stock option gives the holder the right to buy a share at a set price, known as the exercise price. If the market price climbs, the holder can sell the stock at a gain. On paper, Larsen's shares were out of the money because they gave him the right to acquire stock for $33.58 a share at a time when Broadwing was trading on the open market for $24.10.
Larsen still had six and a half years to exercise the options, giving him the potential to profit from future increases in the stock price. But the compensation committee changed the exercise price to $14 a share on Jan. 30, 2004, giving his options a putative value of $363,600.
Freddie Mac, which has been struggling to rebuild accounting systems and return to timely financial reporting since it disclosed billions of dollars in improper accounting in 2003, last year paid signing bonuses of $2 million each to its new chief operating officer, Eugene M. McQuade, and a new executive vice president, Patricia L. Cook. The government-chartered mortgage funding company paid chief financial officer Martin F. Baumann a retention bonus of $300,000 -- one year after paying him a signing bonus of $200,000.
Would Baumann have left if Freddie Mac had not paid the retention bonus?
"That didn't come up," Freddie Mac spokeswoman Shawn Flaherty said. "It wasn't an issue, but we wanted to make sure that it didn't become one."