Exposing the Executive Pay of Beltway Bandits

ARRA logoThe recipient reporting system mandated by the American Recovery and Reinvestment Act is designed to inform the public on how federal stimulus spending is creating jobs. The just-released first phase of that system still has a considerable number of bugs to work out with regard to its job numbers, but it also represents a new step forward in making the operations of federal contractors more transparent.

The rules governing Recovery Act reporting include a requirement (FAR 52.204-11) that certain contractors disclose the amount of compensation paid to their five highest paid executives. These include companies that receive $25 million or more in federal governments as long as federal contracts account for 80 percent or more of their total revenue.

Publicly traded companies already report this information to the Securities and Exchange Commission in their proxy statements, which are made available to the public. The Recovery Act rule is unusual in that it extends executive compensation reporting to privately held firms, which typically keep such information to themselves.

In the new Recovery Act contract data, several hundred contractors provided compensation information, including many that apparently were not required to do so. As shown in the table below, 14 contractors reported compensation in excess of $1 million for their top executive (not including obvious glitches such as a modest-sized excavating company in Washington State that entered $986 million in the compensation column).

Half of the contractors are part of publicly traded companies, and their compensation amounts match what was previously disclosed by those companies. The rest are privately held, meaning that this may well be the first time the pay of their top executives has been officially disclosed.

The most interesting of these is the huge consulting company Booz Allen Hamilton, which since fiscal year 2000 has been the recipient of more than $16 billion in federal contracts. It does business with many agencies, but it is especially close with the Pentagon. Last year it was the 22nd largest military contractor. The Recovery Act reports do not list executive names, but it likely that Booz Allen CEO Ralph W. Shrader was the one who was paid more than $8.4 million last year.

The Recovery Act does not include funding for military purposes, but it forces Pentagon contractors and other Beltway Bandits that happen to be privately held to reveal how richly they are rewarding their top executives with the help of taxpayer funds.

Top Compensation Amounts Reported by Recovery Act Federal Contractors

JOHNSON CONTROLS BUILDING AUTOMATION SYSTEMS LLC
$17,385,308

RAYTHEON TECHNICAL SERVICES COMPANY LLC
$15,056,151

BOOZ ALLEN HAMILTON INC.
$8,457,003

BALL AEROSPACE & TECHNOLOGIES CORP.
$8,111,298

ENERGYSOLUTIONS FEDERAL SERVICES, INC.
$6,336,752

ADVANCED CONSTRUCTION TECHNIQUES LTD
$2,724,660

DANYA INTERNATIONAL INC.
$2,363,143

ROLLS-ROYCE NORTH AMERICAN TECHNOLOGIES INC.
$2,025,860

WEST VALLEY ENVIRONMENTAL SERV
$1,955,909

SCIENTIFIC RESEARCH CORPORATION
$1,471,745

ORBITAL SCIENCES CORPORATION
$1,448,752

STG, INC.
$1,201,762

PARSONS INFRASTRUCTURE & TECHNOLOGY GROUP INC.
$1,128,070

ENVIRONMENTAL CHEMICAL CORPORATION
$1,016,426

Source: Analysis of the combined state spreadsheets provided at the Recipient Reported tab here.

Notes:

The figure for Johnson Controls Building Automation Systems is apparently the compensation of Stephen A. Roell, CEO of the parent company Johnson Controls Inc., which is publicly traded and thus already reported the compensation of its top officers through its SEC filings. The figure above is the same as that reported for Roell in the company’s latest proxy statement.

The figure for Raytheon Technical Services is the same as that reported for parent Raytheon’s CEO William H. Swanson in the company’s latest proxy statement.

Booz Allen is privately held. Its CEO is Ralph W. Shrader.

The figure for Ball Aerospace is the same as that reported for parent Ball Corporation’s CEO R. David Hoover in the company’s latest proxy statement.

The figure for EnergySolutions Federal Services Inc. is the same as that reported for parent EnergySolutions’ chief financial officer Philip O. Strawbridge in the company’s latest proxy statement.

Advanced Construction Techniques Ltd is privately held. Its president is James Cockburn.

Danya International Inc. is privately held. Its CEO is Jeffrey A. Hoffman.

The figure for Rolls-Royce North American is roughly the same (after currency conversion) as that reported for parent Rolls-Royce PLC chief executive Sir John Rose in the company’s annual report.

West Valley Environmental Services LLC describes itself as “a newly-formed company comprised of four companies – URS Washington Division, Jacobs Engineering Group, Environmental Chemical Corporation (ECC), and Parallax/Energy Solutions – with extensive experience conducting environmental cleanup at Department of Energy (DOE) sites across the United States.” Its compensation figure above is the same as that reported in the proxy statement of URS Corporation for URS Washington Division President Thomas H. Zarges.

Scientific Research Corporation is privately held. Its CEO is Michael Watt.

The figure for Orbital Sciences is the same as that reported by the company for CEO David W. Thompson in the company’s latest proxy statement.

STG Inc. is privately held. Its CEO is Simon S. Lee.

Parsons Infrastructure is a unit of privately held Parsons Corporation, whose CEO is Charles L. Harrington.

Environmental Chemical Corporation (which seems to prefer being called simply ECC) is privately held. Its CEO is Manjiv Vohra.

UPDATE: On October 30 Recovery.gov published a revision of the contractor data that fixed various formatting problems and added names to the executive compensation figures. For more details, see here.

A Complete Break?

The contradictory impulses of the federal government were on full display today. At one location on Capitol Hill, a group of so-called Senate moderates were meeting to strip some $80 billion out of the Obama Administration’s economic recovery plan. According to press accounts, they were mainly targeting proposed spending related to education, ranging from Head Start programs to Pell grants for college students. I guess they are telling us that in these hard times we shouldn’t be lavishing taxpayer funds on fat cat students.

Meanwhile, in another part of Capitol Hill, the Senate Banking Committee heard testimony from Elizabeth Warren (photo), Chair of the Congressional Oversight Panel that was created by the Troubled Asset Relief Program (TARP) legislation enacted last fall. Warren gave a preview of her panel’s new report that will contain estimates that, in its purchases of capital stakes in major banks, the Bush Treasury Department overpaid by some $78 billion.

Want to take bets on which group—students or banks—end up keeping their $80 billion?

Warren’s statement was based on a valuation study of a sample of the banks that got federal infusions. “Despite the assurances of then-Secretary Paulson, who said that the transactions were at par,” Warren said, “Treasury paid substantially more for the assets purchased under the TARP than their then-current market value.”

Being generous, Warren said that Treasury may have overpaid as part of a deliberate policy to increase the amount of assistance being given to the banks to enhance the stabilization effort. As I see it, the overpayment could just as easily be seen as incompetence or a corrupt conveyance of value by Treasury officials to their friends in the financial community.

Warren was joined at the hearing by Neil Barofsky, the TARP Special Inspector General, whose testimony echoed her concern about the failure of Treasury to explain the criteria it applied in making its TARP payouts last year. Barofsky also expressed frustration about the refusal of the TARP recipients to reveal what they are doing with the funds. Yet he made it clear that the era of non-accountability is over. Barofsky said his office is moving ahead with plans to ask all recipients for an accounting, and in some cases—such as Bank of America—he is launching an audit of where the TARP money went. Even more tantalizing was Barofsky’s statement that his office has “opened several criminal investigations.”

Warren and Barofsky’s aggressive approach meshes with the Obama Administration’s stance on executive pay, which was announced in the wake of revelations that bailed out Wall Street firms had distributed a total of some $18 billion in end-of-the-year bonuses. It’s unfortunate that the plan does not apply to the many companies and their executives who already took the money (from taxpayers) and ran (to the bank to deposit their bonus checks). Yet, given the likelihood that many more corporations will be receiving federal help in the months to come, some top executives may finally have to endure some sacrifices.

What worries me, however, is that the Administration’s assault on executive pay may be an effort to placate the public in advance of the big new bailout plan that Treasury Secretary Timothy Geithner is expected to announce next week—a plan that could include the creation of a “bad bank” to allow financial institutions to unload their toxic assets onto the taxpayers. Cracking down on the compensation of bank executives feels good, but it will not relieve the pain of another ill-conceived giant bailout.

Given the state of the economy, more federal intervention may be inevitable. Yet Geithner will have to make it perfectly clear next week that the Obama Treasury Department has made a complete break with the irresponsible and opaque policies of the former Paulson regime.

Note: Transparency is an issue not only for the TARP program, but also for the economic recovery plan. The stimulus legislation includes provisions for federal disclosure of money flows, but a new coalition is also calling for greater transparency in the way the states will use those funds.

Trade Associations Squawk at New Pay Disclosure

Whether they are paid lavishly or barely above the minimum wage, Americans usually prefer not to tell others how much they earn. Some people cannot keep their pay entirely private, because their position is subject to public disclosure requirements, such as those that apply to non-profits. The Internal Revenue Service recently issued the first revisions of the compensation disclosure rules for non-profits in 30 years, and that is upsetting some people — especially in trade associations such as the National Football League — whose pay stubs will be exposed to the world for the first time.

The controversy surrounds the Form 990, an annual document through which non-profits — as a condition of remaining tax-exempt — have to disclose extensive information about their finances, including top-level compensation. After being submitted to the IRS, the 990s are made available on the web through sites such as Guidestar and the Foundation Center. The transparency is meant to discourage excessive spending on internal expenses rather than the group’s stated mission.

Currently, non-profits must disclose the compensation of officers, board members and “key employees” (such as an executive director) as well as the pay of the five highest-paid employees who do not fit those categories and who earn above $50,000. The IRS, which oversees non-profits, now wants non-profits to reveal the names and salaries of up to 20 key employees (more broadly defined) earning more than $150,000 as well as the five-highest paid other employees earning above $100,000.

Trade associations — previously not subject to the disclosure rule relating to highly compensated non-key employees — are doing most of the grousing about the new guidelines. The National Football League, which now reveals the salary of only one employee: its Commissioner, is leading the charge against the new IRS rules, saying the added disclosure is not appropriate for organizations that don’t take tax-deductible contributions from the public.

While you’d expect that a professional sports organization might be trying to conceal bloated pay levels, Joe Browne, the NFL’s executive vice president for communications and public affairs, recently strained to suggest to the New York Times that the problem was the opposite: “I finally get to the point where I’m making 150 grand, and they want to put my name and address on the form so the lawyer next door who makes a million dollars a year can laugh at me.”

Working with the American Society of Association Executives, the NFL has begun lobbying Congress for legislation that would allow trade associations to redact the additional salary information from the public version of the 990 (the way charities are allowed to remove information on their largest contributors).

While it is true that trade associations don’t receive donations from the public, they are still tax-exempt, which means that they should give up the financial privacy enjoyed by other private entities. Besides, even the new rules would require that trade associations disclose a lot less salary information than another non-charity type of non-profit: labor unions.

Under the Labor-Management Reporting and Disclosure Act of 1959, unions must file annual forms called LM-2s that, among other things, list the salaries not only of officers but all employees. The U.S. Department of Labor makes the forms available on the web and also provides a search engine that allows you to enter the name of any individual and easily find his or her compensation. How would trade associations feel about that level of mandatory transparency?

CEOs Who Never Pick Up the Tab

I was intrigued by a post that just appeared in Footnoted.org about some companies whose recent proxy statements disclose they are reimbursing top officers for the cost of having their cars washed. We have all heard about the expensive perks large corporations shower on their executives: country club memberships, use of corporate jets, personal financial advisors, etc.—all in addition to munificent salaries and bonuses. Yet are companies also taking care of mundane everyday expenses as well?

In theory, it shouldn’t be possible to learn these details, since even under the more rigorous disclosure rules imposed by the SEC in 2006, companies are not required to list perks worth less than $10,000. Nonetheless, I decided to follow Footnoted’s lead and search the database of recent proxy statement to look for other kinds of personal services being provided to executives. Here’s an assortment of what I found.

SLM Corp.—the student loan company also known as Sallie Mae—reports that it not only provided a townhouse for president C.E. Andrews but also paid for “real estate taxes, homeowner’s insurance, neighborhood association fees, repairs and improvements, utilities, lawn and housekeeping services, and pest control.”

Harris & Harris Group—a business development company focusing on nanotechnology—pays for both a health-club membership and a personal trainer for chief executive Charles E. Harris.

BioLase Technology—a producer of dental lasers—paid the laundry expenses of Keith Bateman while he was executive vice president of the company.

Military contractor Raytheon and numerous other companies pay for security systems at the homes of their top executives.

Home Depot pays for the home internet services used by their top executives and picks up the tab when they send funeral flowers.

Beermaker Anheuser-Busch has a company barber shop for top executives and provides free beer “for personal use and entertaining.”

The costs of these perks are trivial in comparison to the cash compensation the executives receive and are barely a blip in the overall finances of the companies. But they illustrate the regal manner in which the corporate elite are treated. How can a CEO who doesn’t have to pay many of his or her own personal expenses—including in some cases the cost of six pack—understand the situation of those who get nothing for free?

Congress Scrutinizes Compensation of Financiers and Contractors

Through war and peace, recession and expansion, bear market and bull—there is one constant in the American economy: Large corporations will pay their top executives ridiculous amounts of money. As the country focuses more on a weakening economy, some members of Congress are raising questions about the eternal boom in CEO compensation.

Today, the House Committee on Oversight and Government Reform, chaired by Rep. Henry Waxman of California, issued a preliminary report on the research its staff has done in preparation for a hearing tomorrow on the compensation and retirement packages awarded in recent years to the chief executives of three companies implicated in the mortgage crisis: Angelo Mozilo of Countrywide Financial Corporation, E. Stanley O’Neal of Merrill Lynch, and Charles Prince of Citigroup. (O’Neal and Prince no longer hold those jobs.)

In addition to looking at SEC filings, the committee obtained thousands of pages of documents directly from the companies, including board minutes and internal e-mails—some of which the committee has put online.

The report raises a series of pointed questions, no doubt foreshadowing tomorrow’s interrogatories, particularly about Mozilo’s personal stock sales last year, the exceptionally generous “change in control” provision in his employment contract, and the lucrative way in which his cash bonuses have been calculated. Mozilo is estimated to have received a total of about $250 million in pay over the past decade. Uncomfortable questions also appear to be in store for O’Neal and Prince about discrepancies between their personal compensation and the fortunes of their firms amid the mortgage meltdown.

Meanwhile, the Oversight Committee’s Subcommittee on Government Management, Organization and Procurement is considering a slate of contracting reforms, one of which would require all companies—whether publicly traded or privately held—that receive more than 80 percent of their revenue from doing business with Uncle Sam (and get at least $5 million in annual revenue from such contracts) to submit data on their top executives’ compensation for inclusion in a public database. The disclosure bill, H.R. 3928, was introduced by Rep. Christopher Murphy (D-Conn.) in response to the controversy surrounding contracts held by the mercenary supplier Blackwater.

Although the bill would cover only a limited number of larger companies that are heavily dependent on government business, industry representatives testifying at a hearing last week strongly opposed the measure. Their dubious argument, echoed by a Bush Administration official, was that the disclosure would have a “chilling effect” on the willingness of companies to compete for contracts. The idea that companies receiving more than three-quarters of their revenue from the federal government would walk away from that market is laughable.

For a good assessment of the disclosure bill and the other contractor reform measures being considered by the subcommittee, see the prepared testimony submitted by Scott Amey, General Counsel of the Project On Government Oversight.