Some of the biggest pay jumps last year for Baltimore-area CEOs went to heads of companies that were in the midst of significant transformations.
Colfax, an Annapolis Junction-based industrial manufacturing firm, has evolved in a few years from a $700 million-a-year pump maker into a $4.6 billion enterprise through a series of acquisitions. It rewarded its CEO of three years with a $12.6 million package — a fivefold increase that's actually tied to future performance.
Medifast, which expanded its line of weight loss products and shifted from company-owned diet centers to franchises, paid CEO Michael C. MacDonald $6 million, mostly in stock awards, up from $2.5 million, even as the repositioning hurt revenue and profits. Millennial Media CEO Michael G. Barrett earned $9.5 million, roughly twice as much as his predecessor in 2013, as he was brought in to guide the mobile advertising firm as it coped with mounting losses and a tumbling stock price.
And at W.R. Grace & Co., part of CEO Fred Festa's 88 percent jump in compensation to $8.67 million came from a $1.5 million bonus for the Columbia-based specialty chemical maker's exit last year from one of the longest-running bankruptcies in history.
For the most part, executive pay for the Baltimore's top CEOs increased last year as disclosed in their companies' annual proxy statements.
"Overall, we're seeing that CEO compensation is up over 2013," said Sue Holloway, executive compensation practice leader, for WorldatWork, "Some of the companies have performed well, and CEOs are being rewarded for that. The stock market has done well over the past year, and companies and CEOs are beating their performance targets and incentive programs, so you would expect to see an increase in compensation to be rewarded for that performance."
Total CEO pay jumped more than 12 percent nationwide in 2014, accelerating at the fastest clip since 2010, according to a survey by professional services company Towers Watson. The firm reported a 1.6 percent median increase in 2013.
CEOs at seven Baltimore-area firms bucked the trend and saw compensation decline, including those at Chesapeake Lodging Trust, Omega Healthcare Investors and Sinclair Broadcast Group.
Holloway cautioned that such year-over-year comparisons can be misleading because the timing on bonuses and stock awards can cause compensation to swing up and down.
Pay packages include base salary as well as cash bonuses, the value of long-term incentives and the change in value of executive pensions, among other items. While base salaries nationwide rose nearly 3 percent, about the same as in 2013, long-term incentives tied to performance — the biggest chunk of executive pay in major companies — jumped more than 7 percent, Towers Watson found.
In the Baltimore area, the average pay for the top 25 public company CEOs was about $4.27 million. That's about 77 times the $55,391 average annual pay for Marylanders last year after a 2.4 increase, according to the Bureau of Labor Statistics.
Executive compensation packages in the Baltimore area reflect national trends with continued growth of performance-based pay and higher pension value, reflecting the surging stock market. Increasingly, CEO pay is tied to meeting future performance goals, often through stock options and restricted shares that vest over a period of years.
"The way to earn [options] is to increase the value of the company, which benefits all shareholders," said Chris Hamilton, a senior consulting director at Towers Watson. "Stock options are very performance oriented."
For example, Coflax's future performance will determine whether Steven E. Simms, the Baltimore area's top-paid CEO in 2014, ends up bringing home the $12.6 million package.
Simms came out of retirement to head the company in 2012, three months after it acquired and merged with a much larger company and expanded into new businesses, including gas handling and fabrication technology.
After guiding the company's explosive growth for several years, Simms secured a more generous extension of his expiring compensation agreement in 2014 even as Colfax faced sluggish demand and failed to meet sales and other financial goals.
"Since Steve Simms' appointment as CEO in April 2012, his leadership has been critical to the transformation of Colfax," said Terry Ross, a Colfax spokesman.
The bulk of Simms' compensation last year was $6 million in stock awards and $4.7 million in option awards, recognized as 2014 pay but tied to future targets. For example, the stock awards are tied to earnings targets through 2017.
At W.R. Grace, while CEO Festa's salary remained $975,000, his compensation surged 72 percent thanks to the bankruptcy exit bonus and a more than three-fold increase in a cash bonus tied to performance metrics to $824,586. Grace also reported a $1.22 million change in the value of his pension and deferred compensation.
The chemical maker's earnings increased 7.9 percent in 2014, while its stock price shrank by 3.5 percent.
"There's no question in anybody's mind here that this is aligned with the company's performance," said Rich Badmington, a Grace spokesman. "The company outperformed what it did the previous year, and the formula produces a difference that is reflected in that bonus."
But high pay does not always reflect performance.
Medifast's CEO saw his compensation more than double even as the company struggled last year with its transition.
"We believe that it is important, during this time of transition, to retain the talented executives who can lead us to become a stronger company and to deliver value to our shareholders, but also to ensure that our executives are rewarded in line with the results that they deliver," Medifast said in its proxy.
Company officials declined to comment, but much of the growth came in the form of stock awards that do tie what he made to the company's future performance.
At Millennial Media, the mobile advertising pioneer brought in Barrett, a former Yahoo executive, to replace founder Paul Palmieri as CEO in January 2014 as it struggled to compete with giants like Facebook and Google.
The compensation package he received — $467,000 salary, $3.35 million in stock awards and $5.35 in stock option awards — is roughly double the $4.6 million Palmieri took home the year before.
Meanwhile, Millennial's losses widened from $15.1 million in 2013 to $149.1 million last year. In its annual report, the company acknowledged it does not know when or if it will ever achieve profitability.
Yet Millennial's board awarded executive bonuses — including $360,000 for Barrett — for 2014, after adjusting revenue and earnings targets midyear. It made the adjustments "due to significant changes in market and industry factors impacting the company's 2014 performance and outlook, and necessary for employee retention purposes," according to its proxy.
The firm, which Verizon's AOL business is reportedly eyeing as an acquisition, declined to comment.
Kathleen Day, a professor at Johns Hopkins University's Carey School of Business who specializes in corporate governance, believes corporate boards of directors need to question compensation more.
" 'Could we get an equally good senior executive, a top executive, for less, maybe $4.5 million rather than $9 million?' " Day suggested. "Even if the company has done splendidly, even if it's tied to profit, the question remains: Could they have gotten the same performance and paid less?"
Corporate governance experts argue that paying for performance makes sense but flaws exist in a structure that makes pay at "peer" companies the starting point for compensation.
The thinking has been that pay must be comparable to competitors to keep a valuable CEO from jumping ship, but that's not true, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
"They don't move," Elson said. "The skills are more company-specific."
Performance-based pay has become more mainstream in recent years as investors pressure boards to align the interests of executives and shareholders.
Last year was the first in which pay at most companies in the S&P 500 was linked to achieving performance goals, typically a mix of annual incentives and longer-term incentives generally paid in stock, said Peter Kimball, vice president of ISS Corporate Solutions, a corporate governance consultancy and division of Institutional Shareholder Services.
The Evening Sun Newsletter
Get your evening news in your e-mail inbox. Get all the top news and sports from the baltimoresun.com.
"For several years, most large institutional investors have put pressure on companies to link more of the executive pay to rigorous and pre-established performance goals," he said.
Some of Baltimore's largest companies, including Under Armour, Legg Mason, T. Rowe Price and McCormick & Co., already link executive compensation to corporate financial performance.
At McCormick, for example, CEO Alan D. Wilson's pay nearly doubled to $10.3 million last year as the company saw improved profitability — and as the value of his pension surged.
"Our philosophy is based on a pay-for-performance model designed to reward achievement of the company's financial goals and strategic objectives," said Lori Robinson, a McCormick spokeswoman. "We also believe it's important to align executive interests with those of the company's stockholders."