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CEO pay rises at most local public companies

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As pay raises go, it's hard to beat a fivefold increase.

That's the jump Hunt Valley-based Omega Healthcare Investors' CEO saw in compensation last year. After getting a thumbs down for its executive pay from a shareholder advisory firm, the company told investors his pay package skyrocketed to $7.8 million because stock awards at the firm are doled out once every three years or so, and 2011 was one of those years.

But even with the adjustments Omega suggests, such as dividing the multiyear incentives by three, CEO C. Taylor Pickett's pay doubled — in a year in which the company's profits and stock price fell.

The executive pay data disclosed this year by the Baltimore region's 20 largest publicly traded firms in terms of revenue offers plenty of fodder — as it does every year — to feed the ire of workers whose paychecks barely budge, if they budge at all.

A dozen CEOs saw double-digit increases in annual compensation. And Mayo A. Shattuck III, who retained his spot at the top of the list in his last year running the then-independent Constellation Energy Group, received a nearly $17.4 million package in 2011 — up from $15.7 million — as the Baltimore company turned in its second straight year of multimillion-dollar losses.

Exelon Corp., Constellation's new parent, contends that total compensation really was flat — it's just that the fluctuating value of Shattuck's pension plan rose last year. The company defended Constellation's executive compensation as "pay for performance."

"News of Constellation's merger with Exelon in 2011 created more than $1.5 billion in value for Constellation shareholders by the time the merger closed in 2012," said Paul Adams, an Exelon spokesman, in a statement.

Meanwhile, six local CEOs received pay cuts — big ones. Take, for instance, Corporate Office Properties Trust's Randall M. Griffin, whose compensation was slashed in half in his final full year with the real estate investment trust before he retired.

The company recorded a nearly $134 million loss in 2011 after taking impairment charges on properties it intended to sell, and its stock was pummeled by investors fearful of its reliance on the budget-crunched federal government.

Most of the reduced CEO pay was paired with sinking company performance, but not all. Under Armour's Kevin A. Plank, who has built a reputation for comparatively modest pay packages, saw his compensation drop 14 percent last year to $1.1 million as the sports apparel company's profits and stock price soared.

Plank wasn't awarded more, the Baltimore company told shareholders, because Under Armour didn't meet all its goals. (He's not hurting. The Under Armour founder is his company's biggest shareholder and made Forbes' list of the 400 richest Americans this year.)

Anger over big payouts for high-flying execs has grown in recent years as the rough economy buffets average Americans. A.L. "Tom" Giannopoulos, who heads Columbia-based Micros Systems and is No. 3 on the local top-compensated list, said it's no secret that there's a "negative attitude toward CEO pay."

"In certain cases, yes, you have an abuse," he said last week. "And in certain other cases, you have a reasonable pay package that is a win-win situation for the shareholders and management. When the company performs well, like we have, then management gets a reasonable pay package."

He thinks his pay falls on the reasonable side of the fence because most of the nearly $8.7 million he received in Micros' 2011 fiscal year, which ended June 30 of last year, came in the form of a bonus and stock options he wouldn't have received if the company hadn't met its annual revenue and profit goals.

Giannopoulos' pay rose 10 percent as Micros' profits increased 26 percent and revenue crossed over the $1 billion mark. The stock price jumped by more than half. In the fiscal year that included the roughest stretch of 2008 and 2009, by contrast, his pay was a much lower $2.8 million.

At Omega Healthcare, a real estate investment trust that specializes in nursing homes, profits slipped 4 percent and its stock price dropped 14 percent last year. But it, too, characterized its CEO pay as fair after Institutional Shareholder Services, an investor advisory firm, called the company out for high compensation at a time of "lackluster returns."

In a letter to shareholders, Omega said that its executive compensation — which made Pickett the fifth-highest-paid local CEO — "is very reasonable" considering the company's steadily rising dividends and an annualized shareholder return in the previous 10 years that far outpaced the Standard & Poor's 500 index.

Omega, which did not return messages seeking comment, couldn't convince all its shareholders. Investors holding 27 percent of shares rejected the executive pay program in an advisory "say on pay" vote in June. Nearly all had voted in favor the year before.

Kent S. Hughes, managing director of Pennsylvania-based Egan-Jones Ratings Co.'s proxy advisory service, which researches executive pay and other issues for shareholders, said there isn't a rule of thumb about how many "no" votes are too many. But 20 percent or higher strikes him as significant.

"It ought to be a kind of wake-up time to look at things," Hughes said. "Not take knee-jerk reaction, but certainly not let it go by without recognition — and without some outreach to certain institutional investors."

This is the second year of say-on-pay votes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Patrick S. McGurn, special counsel at Institutional Shareholder Services, said boards don't like the votes but do pay attention.

"This has stimulated a great deal of engagement on compensation issues that was never taking place in the past," he said. "We've seen a huge behavioral change in board rooms."

The Baltimore Sun's analysis of pay at local public companies with at least $100 million in annual revenue focused on firms' 2011 fiscal year, except for the handful of companies with a 2012 fiscal year that ended no later than this spring. The typical CEO received 11 percent more than the year before.

That's a much bigger bump than most workers see — even most high-level employees. The typical hourly worker in the United States got a 3 percent raise last year, as did the typical company officer or executive, according to human resources research group WorldatWork.

Pay packages vary in the measures used to qualify executives for incentives and how much that year's performance affects rewards. Otherwise, you wouldn't see two companies with drastically different results give their CEOs essentially the same raise, as did Tessco Technologies of Hunt Valley and Annapolis-based TeleCommunication Systems.

Tessco's Robert B. Barnhill Jr. saw his compensation rise 57 percent, to nearly $2.2 million, in the 12 months ending April 1, as profits jumped 64 percent and the stock price more than doubled.

TeleCommunication increased CEO Maurice B. Tosé's pay last year by 55 percent, to nearly $2.7 million, as the company's profits and stock price were slashed in half. Institutional Shareholder Services said in an analysis that it had a high level of concern about the "pay-for-performance disconnect." (ISS had concerns about Tessco's compensation structure, too, but not about the amount of its CEO pay, which is lower than its peers'.)

TeleCommunication, which makes mobile communication technology, did not respond to requests for comment. Neither did Tessco, a provider of products for wireless broadband systems, though it noted in a Securities and Exchange Commission filing that it "delivered record revenues, gross profits and earnings" that year.

Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, thinks the problem with executive pay isn't the outrageous examples so much as the entire system.

Corporate boards believe CEOs will jump ship for a competitor if the pay is better elsewhere, so they benchmark compensation against the amounts shelled out by peer firms. TeleCommunication's board, for instance, said in an SEC filing that it increased Tosé's 2011 base salary nearly 15 percent after determining that 2010's nearly $520,000 was "not at the level which is comparable to Chief Executive Officers in the peer group."

But Elson argues in a new study with co-author Craig K. Ferrere that this reliance on paying at least as well as the typical peer inflates pay — one CEO's raise ripples widely — and is based on a faulty assumption. It turns out that public companies hardly ever hire chief executives from other public companies, he said.

"And when they do move, the results are lackluster to poor," Elson said in an interview. "Executive talent is not transferable — or not as transferable as we thought."

He's hopeful that boards will ditch the peer-group model and pay based on internal factors specific to each company, which could halt the rapidly widening gap between CEOs' paychecks and everyone else's. When the top guy earns tremendously more than his or her employees, including other high-level executives, it has an insidious effect on company performance, Elson said.

"It's … dispiriting to the organization, which creates a longer-term profitability issue," he said.

Baltimore Sun reporters Eileen Ambrose, Steve Kilar, Lorraine Mirabella and Gus G. Sentementes contributed to this article.

jhopkins@baltsun.com

twitter.com/jsmithhopkins

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