Earning power

Maryland's highest-paid executives


Martine A. Rothblatt has led a Silver Spring biotech, United Therapeutics Corp., to profitability but received only half of her potential bonus last year because the company missed some stringent financial targets set by her board.

It didn't hurt the chief executive's paycheck too much, though: She still received other pay valued at $47 million, partly because the board replaced stock options that had become worthless with ones that have a greater chance of making money.

A variety of pay programs contributed to some of the most lucrative pay packages among Maryland CEOs last year. After Rothblatt, who made the most in the state, Raymond A. "Chip" Mason received a compensation package worth $40 million from Legg Mason Inc., and about 50 other CEOs earned at least $1 million in total pay, according to a survey by Salary.com of 100 public companies with headquarters here.

The Sun commissioned the survey, which is based on data obtained from proxy statements and other public filings, and on Salary.com's estimates of the future value of stock options.

Although "pay for performance" has become the catchphrase in boardrooms, executive compensation continues to swell at companies thriving and not, large and small, through practices that have drawn scorn from investor groups and labor unions.

Critics complain that the process is rigged in favor of chief executives and can lead to one-time surges in pay.

"No CEO is so talented that his or her compensation should be unlimited," said Brandon Rees, assistant director of the office of investment at the AFL-CIO. "Every dollar in excessive executive compensation comes out of shareholders' pockets."

One disputed pay practice that companies use is reloading, or re-pricing, stock options -- effectively giving executives a second chance to benefit. They also link bonuses to financial measures that swing upward with a merger or acquisition. They boost payouts above previously set ceilings or dole out retention bonuses and restricted stock that reward executives for sticking around.

With corporate profits rising and stock markets holding steady through last year, the debate over executive pay has shifted from demands that CEOs deliver stellar results to also ensuring that they aren't paid excessively.

Shareholder anger erupted this year at companies including Exxon Mobil Corp., where former chief Lee Raymond, lauded in the past for record earnings and a highflying stock price, weathered flak at the petroleum giant's annual meeting over his hundreds of millions of dollars in pay and retirement benefits.

Nationally, the median CEO base salary of large companies remained flat last year at $975,000, while bonuses rose 8.4 percent, according to a survey by Mercer Human Resource Consulting.

Total compensation, including stock options and other long-term incentives, rose 5 percent to a median $6.8 million, an increase of 150 percent since a decade ago.

Compensation packages have become increasingly complex in recent decades, shaped partly by corporate-board philosophies on how best to align the interests of top executives and shareholders, company officials say.

An increase in one part of a pay package -- such as an equity grant -- coupled with cuts in other areas -- such as salary or bonuses -- is not contradictory, they say, but rightly rewards different objectives, including building profits and thinking strategically for the long term.

"Yes, there can be higher rewards, but I disagree with the idea that executives can't lose," said Chris McGee, a principal at Mercer who works with several companies in the Baltimore-Washington corridor. "With executive compensation, you see a couple of egregious situations here and there, and then it's taken like all executives are pigs."

Company officials also say that stock options are technically worthless initially. Options allow executives to buy stock at a specified exercise price that is set at current market prices on the day they are granted. Their eventual value depends wholly on whether, and by how much, a stock rises subsequently.

Nonetheless, companies must assign a value to granted options under federal disclosure rules, and many use some version of an algorithm that assumes the stock will gain.

To allow for uniform comparisons among companies, Salary.com calculated the value of options by using the Black-Scholes method, named for economists Fischer Black and Myron S. Scholes, who devised it in the early 1970s.

Salary.com plugged into the formula standardized assumptions on interest rates and other factors. Because of that, its computed values for stock options differ from those assigned by the companies in many cases, sometimes substantially.

CEO pay has ballooned in recent decades for many reasons. Some say the main one has been the unintended consequences of government regulation.

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