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Originally published Saturday, June 19, 2010 at 10:09 PM

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Some CEOs gained handsomely from market's 2009 rebound

The stock market's rebound last year proved a gold mine for some local CEOs, although the median compensation reported by companies declined.

Seattle Times business reporter

There are two stories to tell about Northwest CEO pay in 2009: what the numbers say, and what the numbers miss.

Here's the statistical story: The median compensation of top executives of publicly traded companies headquartered in Washington, Oregon and Idaho dropped 28 percent last year, according to a survey prepared for The Seattle Times by executive-pay research firm Equilar.

The main reason: a 36 percent plunge from 2008 in the median reported value of stock and stock-option awards. CEO compensation also was down nationally, a decline many attribute to the recession and increased government and public scrutiny.

But here's what the numbers don't reveal: Some of the 128 Northwest CEOs stand to make a lot more than the totals that show up in their company proxy statements and Equilar's spreadsheet.

For some whose reported pay was lower in 2009 than 2008, down may well be up.

Here's why: Many CEOs were granted options or stock early last year, when the stock market had tanked and their companies' share prices were scraping bottom. Those low prices were reflected in the values company accountants assigned to the executives' equity awards.

When the stock market bounced back and share prices soared, so did the value of those awards.

In most cases the grants won't fully vest for several years. Still, right now some CEOs are sitting on potential gold mines.

Among them: Starbucks' Howard Schultz, the best-paid Northwest CEO in 2009, and William Morrow, of Kirkland-based Clearwire, who ranked third.

People who track executive pay have known for years there's a disparity between what CEOs really make and what companies are required to report, said Fred Whittlesey, West Coast practice leader with the executive-compensation consulting firm Hay Group.

The stock market's volatility in 2009 exacerbated that discrepancy, he said, and underlined the need for more sophisticated, multiyear analysis of CEO pay.

"The companies are following the SEC rules," Whittlesey said, "and the numbers they're producing are not the reality."


The prospect of big paydays for CEOs in the middle of a recession infuriates some critics of executive pay.

"It's outrageous to see these guys use the economic crisis as a springboard to even greater windfalls," said Sarah Anderson, who monitors executive compensation for the liberal Institute for Policy Studies in Washington, D.C.

"No matter what they do, they still come out ahead."

But others see no outrage. "In a sense they're being rewarded for good behavior," said Peter Brous, finance professor at Seattle University's Albers School of Business.

"Sure, they've been highly rewarded — but so have the shareholders."

Stock options, in particular, are gambles — worthless if the company's share price later drops below the predetermined "exercise price" at which executives can buy the stock. The options many CEOs received in 2007 and 2008 remain "underwater," noted Carol Bowie, who studies corporate governance for Institutional Shareholder Services, an advisory firm in Rockville, Md.

When companies granted equity awards during the year's first quarter — a common time to do so — they had no way of knowing the market would rebound, she added.

But it's reasonable to question whether CEOs deserve the potential windfalls their 2009 equity awards represent, Bowie said, "when shareholders have yet to really recover their losses."

Cuts for some CEOs

Not all Northwest executives shared in the rewards of last year's bull market. Eleven of the 70 CEOs who got stock or stock options in 2008 received none in 2009.

Others voluntarily took less: Mark Pigott, CEO of Bellevue-based truck manufacturer PACCAR, turned down a performance-based stock award valued at nearly $2 million.

"There were plenty of cases where companies that laid off employees or cut back their salaries also trimmed their CEO's compensation to follow suit," said Aaron Boyd, Equilar's head of research.

Median cash pay — base salary and bonuses — remained essentially unchanged from 2008. Fewer Northwest CEOs got bonuses — 63 percent, compared with 76 percent in 2008 and 89 percent in 2006.

"Other" pay — a catchall category that includes such perks as bodyguards, auto allowances, use of corporate jets and 401(k) matches — fell 9 percent on average from 2008.

But equity compensation — the lion's share of some CEOs' total pay — is more difficult to value. For some, reported declines in 2009 may really have been increases.

Case in point: Dara Khosrowshahi, CEO of Bellevue-based online-travel company Expedia.

The company pegged his 2009 compensation at $4.8 million, 34 percent less than in 2008. He got more cash, according to Expedia's proxy statement, but a smaller equity award: options valued at $1.3 million — a projection based on the stock price of $7.36 when the award was made on March 2, 2009 — compared with $5 million in stock the year before.

Here's the deal, though: As his 2009 options vest over the next three years, Khosrowshahi can exercise them and buy shares for as little as $7.36.

The stock closed Thursday at nearly three times that price. Khosrowshahi's options package had a value on paper of $5.7 million, more than four times what Expedia estimated.

Plug in that updated number and Khosrowshahi made more, not less, in 2009.

Soaring values

Another example: Ralph Quinsey, CEO of TriQuint Semiconductor of Hillsboro, Ore. The company reported he was paid $909,000 last year, down 33 percent from 2008.

Quinsey's 2009 compensation included stock options granted in March of that year that TriQuint valued at about $350,000. As of the close of trading Thursday the company's share price had more than tripled, and those options were worth $1.75 million on paper.

Neither TriQuint nor Expedia would discuss their CEOs' pay.

Quinsey's options started vesting three months after they were granted, Khosrowshahi's a year after they were awarded. Neither has exercised any of those options yet, according to insider-trading reports.

But the vesting timetables point to what Doug Kilgore, who monitors larger Northwest corporations on behalf of construction unions with big pension funds, said is a flaw in the way many CEOs are compensated.

When equity awards vest that quickly, he said, they put executives' interests at odds with those of long-term investors: "We're basically making day-traders out of them in order to get paid."

Executives should hold most of their stock and stock options as long as they're employed, said Kilgore, executive director of the Worker Owner Council of Washington State. At a minimum, he said, options and restricted stock shouldn't vest for at least three years.

"Our investors have a 30-year time horizon," Kilgore said of the union members whose pension-fund investments he represents. "They [CEOs] should, too."

Most of Quinsey's options don't vest until next year, and Khosrowshahi can't exercise a majority of his until 2012. That's a step in the right direction, Kilgore said.

More companies are extending vesting schedules or requiring CEOs to hold stock longer, Equilar's Boyd said. The idea is to encourage executives to manage for the long haul, not "push for the quick buck."

Eric Pryne: 206-464-2231 or

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