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That's a lot of clams
It takes the salaries of 131 workers in the state to equal the median pay of the 50 best-paid executives at Colorado's public companies.  The gap has doubled since 2002, when it was 67-to-1.
By David Milstead
Rocky Mountain News
Sunday, May 6, 2006

Colorado incomes are rebounding after the recession.  But Colorado executive pay is skyrocketing.

  The median compensation among 50 top-paid executives in 2005 was $5.34 million, up 40 percent from 2004.

  The cutoff to make the list is $3.27 million, up from $2.57 million in 2004 and $1.96 million in 2003.

  The median pay for all the executives studied -- 262 for 2005 -- was $1.21 million, up an eye-popping 59 percent from 2004.

  147 executives took home at least $1 million before taxes.  That's up from 115 in 2004, 101 in 2003 and 92 in 2002.

By contrast, the average annual wage in Colorado in the first three quarters of last year was $40,959, up 4.1 percent from the same period the year before.  Colorado executives' good fortunes mirror the national trend for executive pay.  Multiple national surveys reported double-digit pay gains in 2004. Surveys of 2005 pay released so far indicate more increases.

CEOs at the nation's largest companies now earn roughly 400 to 500 times the pay earned by the average worker, according to some estimates.  That's believed to be the widest gap in the Western world.

And it's expanded markedly since the early 1980s, when the ratio was 42-to-1, according to the Institute for Policy Studies, a think tank that says it promotes issues such as peace, justice and the environment.

"There are no signs of boards deciding that they would like to close that gap," said Paul Hodgson, a senior research associate at The Corporate Library, a Maine-based group that analyzes compensation at top U.S. corporations.

"Every time the differential widens, I think it tends to galvanize opposition to CEO pay levels."

CEOs reap options profits

The Rocky Mountain News looked at the 50 most valuable public companies in Colorado, as determined by market capitalization, examining the pay for all executives, CEO and below, who were listed in the compensation tables in the annual proxy to shareholders.

Profits on stock options were counted as part of total pay.  Many of these stock options were granted years ago -- 10 years, in some cases -- and don't reflect the current decisions of boards of directors.

They do, however, reflect three years of rising stock markets and the healthy option profits that result.

The Bloomberg Rocky Mountain News Index increased 42 percent in 2003 and roughly 17 percent in each of the past two years.

The 262 executives in the News' pay survey racked up a total of nearly $244 million by exercising stock options in 2005.  By year's end, they still had $916 million in options left to use.

Two Colorado executives powerfully illustrate the long-term benefit of stock options.

Aleron H. Larson Jr., a former Breckenridge attorney, spent most of the past 30 years in the oil and gas industry, serving as chairman or CEO of a number of companies.  He settled in quietly in 1987 at Denver-based Delta Petroleum, where he served as chairman until July 2005.

For much of Delta Petroleum's life as a public company, its stock lagged, dipping below $2 in late 1998.  About that time, the company's board decided to "re-price" the executives' stock options, cutting the exercise price to 5 cents per share for Larson's 559,000 options.  The company also extended the time before the options would expire.

That was enough time for the company's shares to rise and trade between $13 and $15 in the company's last fiscal year, ended in June 2005.  Larson exercised 1.2 million options -- his re-priced options, plus others granted him over the following years -- for a profit of $13.8 million.

"The stock has gone up dramatically, he retired, and he exercised his options," said Dave Donegan, the company's vice president of corporate communications.  Donegan couldn't comment on the board's 1990s-era decisions.

Edward A. Labry III of First Data Corp. isn't technically a Colorado executive.  He was president of Concord EFS, the Memphis, Tenn.-based transaction-processing company, before First Data acquired it in 2004.

The company kept Labry on as president of subsidiary First Data Commercial Services.  And it inherited the obligation to eventually pay Labry for the 16 million Concord stock options he'd accumulated in his nearly 20 years at the company.

When the merger closed, Labry was the proud owner of 6.4 million First Data stock options.  And he used 1.45 million of those in 2005 for a pretax profit of $37.7 million.  At year-end 2005, he had $62.3 million worth of options to go.

Option profits contributed roughly half the pay of the two executives at the top of the News' annual list, David Mandarich and Larry Mizel of MDC Holdings.  Each executive claimed roughly $20 million from their stock options on their way to total pay that topped $40 million for each of them.

Moving to restricted stock

It will take a long time to work these options out of the pay system.  But companies are setting the stage for a much different compensation scenario in the long term.

For most of the 1990s, companies offered up bucketloads of options as compensation for their executives.  Accounting rules did not require companies to reflect any expense for the options in their net income.  It was like free money, particularly when rising share prices lifted all executive boats, whether the companies outperformed the broad market averages or not.

But the implosion of the tech sector, followed by the Enron and WorldCom accounting scandals, gave new life to the movement to expense stock options.  Investing legend Warren Buffett noted, "If options aren't a form of compensation, what are they?  If compensation isn't an expense, what is it?  And if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

So companies began a move back to once-popular "restricted stock."

Restricted stock shares "vest," or become usable, only over time -- say in three to five years.  Sometimes the stock vests early if performance targets are met.  And sometimes the stock doesn't vest at all if a company's performance falls short.

Mark Sexton, the CEO of Evergreen Resources until its 2004 sale, took no cash compensation when he joined the Denver-based clean-coal company KFx in 2005.  He did, however, get 1 million shares of restricted stock -- worth $14.2 million -- on the day of the grant.  He needs to stay seven years for the stock to vest.

Unless, that is, KFx hits some very significant targets -- the average closing price of KFx common stock must equal or exceed $45.05 per share for 90 consecutive calendar days, or annual revenue must increase to $1 billion, or annual net cash flow must increase to $250 million.  Those are long-term goals for a company that, in fiscal 2004, posted $28,000 in revenue and operating cash flow of $494,000.

Colorado executives received $151.3 million in restricted stock in 2005 -- more than double 2004's amount and nearly as much as in all three previous years combined.

But option grants are not falling off nearly so quickly.  Of the 262 executives in this year's study, 167 received options.  That's down from 173 in 2004 and 190 in 2003.

All told, they received 28.3 million options.  That's the biggest option total in the past three years.  Thirteen execs got at least 500,000 apiece, and four of those got at least 1 million, led by Qwest CEO Dick Notebaert.

Design of pay plans improves

Compensation consultants, the advisers who assist corporate boards in these decisions, say there's been a marked improvement in the design of pay plans.

Don Sagolla, a pay consultant for Mercer in Los Angeles, said his firm compared company financial performance with executive compensation and found links.  Lagging firms were in some cases cutting total pay or giving no salary increases.

"What's been happening . . . is more transparency and more of a premium on pay for performance," Sagolla said.

But the continuing rise in the stock market, and the executives' stock-option profits from long-ago option grants, make it difficult to evaluate the claim when executives' take-home pay is examined.  One thing that continues to rile investors, however, is multimillion-dollar payouts at companies that have seen declining financial and stock performance.

"The shareholder mind-set remains very much, great performance deserves great pay," said Kevin Cameron, the president of San Francisco-based proxy-advisory firm Glass Lewis.  "It's only when the two diverge that the shareholders really want to stick up their hands."

The AFL-CIO has increasingly monitored executive pay and launched a Web site at /paywatch.

"There is still a continuing disconnect between CEO pay and performance, and a growing reliance on hidden forms of compensation, including retirement benefits and perks," said Brandon Rees, an analyst at the AFL-CIO's investment office.

"We need more board accountability."

Top 50 in Colorado executive compensation

Search Colorado's 262 top paid executives

Beyond salary

To the chief of a big publicly traded company, it's pocket change.  To an average worker, the value of a perk is huge, often more than an annual salary.  Here are a few of the sundries given to executives in Colorado, based on a review of regulatory filings:


Dick Notebaert is swimming in perks.  Qwest's chief executive received $1.1 million in "other compensation," including $462,500 for personal use of a plane, $75,000 in "flexible benefits" that can be used for a perk of his choice, financial consulting and a personal assistant.

First Data

Henry Duques, the chief executive officer, benefited from car and apartment lease expenses of $33,787 and financial planning services valued at $50,598.  First Data's former boss, Charlie Fote, received $46,000 for country club fees, $17,500 for personal use of a jet and $30,300 for financial planning services.

Janus Capital Group

Chairman Steve Scheid was compensated $13,210 for a leased car, while Chief Executive Gary Black was reimbursed $121,600 for housing.  The company paid $18,800 for Black's personal use of the jet.

Red Robin

Chief Executive Dennis Mullen was repaid for travel expenses to commute from his Arizona home to the company's base and for a furnished apartment in Denver.  The commuting costs came to $46,000, while the company paid $32,600 to cover taxes related to those costs.  Red Robin also gave him a car allowance valued at $3,751.


Chairman and CEO Charlie Ergen spent a lot of time in the air.  The company put the price tag of his personal use of a plane at $485,250.

Liberty Global

Gene Musselman, president of the company's UPC Broadband division based in the Netherlands, received $276,000 in other compensation, including a cost-of-living differential, a car allowance -- even tuition for his children.

Centennial Bank

The company covered the following perks for David Boyles, its president: $1,980 for garage parking, $1,586 for use of a car owned by the company and $7,077 for club memberships.  But the company said in the third quarter of 2005 it stopped reimbursing executives for club membership dues.


Harvey Wagner, the top officer, reeled in total pay of $833,500 last year, according to the company.  But he didn't use any of that to cover his "living expenses," a bill of $78,000 paid by the company.


Nearly $79,000 to cover travel expenses for three executives -- and their spouses -- who went on a "company-sponsored sales trip."

Staff writer James Paton contributed. David Milstead is finance editor of the Rocky Mountain News. He can be reached at or 303-892-2648.,2777,DRMN_23908_4678196,00.html

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