WHETHER CEOS DESERVE what they get paid remains a hot topic in the financial community. Outsized compensation packages continue to stir criticism even from such respected voices as legendary investor Warren Buffett. In his annual letter to 2003 Berkshire Hathaway shareholders, Buffet noted, “In judging whether Corporate America is serious about reforming itself, CEO pay remains the acid test. To date, the results aren't encouraging.”

Public home builder CEOs didn't escape the spotlight last year—and may not again this year. A year ago, when Credit Suisse First Boston home building analyst Ivy Zelman reviewed 2002 housing CEO compensation, Forbes magazine responded with a sharply critical take on what the analysis showed. Median compensation for top builders increased 43 percent over 2001 to $10 million, according to Zelman's report. That outpaced earnings per share (29 percent) and pretax income (31 percent), while home builders' median stock price increased just 2 percent during 2002, she noted. In addition to suggesting that stocks of home builders were due for a fall, the article drew parallels between builder CEO pay packages and those awarded to high-tech and telecom executives prior to the rapid decline of their respective industries from 1999 to 2000.

Investors who bet on Forbes conclusions, however, would have bet wrong. The home building industry continued to post record results in 2003.

Defying predictions of impeding demise, builder stock prices more than doubled last year while net (after-tax) income for the top 20 public builders increased 39 percent. A BIG BUILDER survey of company filings indicates that the CEOs didn't do too badly once again—earning generous packages. At least this year, it appeared more CEOs delivered real shareholder gains for what they earned.

Robert Toll, chairman and CEO of Toll Brothers in Huntingdon Valley, Pa., led the pack. Toll's 2003 package consisted of $1.2 million in salary and a $20.3 million bonus. Including the fair value of options granted and other compensation, Toll totaled $24.1 million. Rounding out the top five are Bruce Karatz of Los Angeles, Calif.-based KB Home ($23.8 million), Ara Hovnanian of Red Bank, N.J.-based Hovnanian Enterprises ($21.1 million), Larry Mizel of Denver-based MDC Holdings ($19.1 million), and 2002 leader R. Chad Drier of The Ryland Group in Calabasas, Calif., who earned $18.2 million.

Relative bargains included Dwight Schar of NVR and Donald Tomnitz of D.R. Horton. Schar's $3.3 million package represents 0.8 percent of NVR's net income for the calendar year 2003. NVR also delivered the highest return on equity of the group surveyed at 86 percent. Meanwhile, Tomnitz's $5.8 million package also represents 0.8 percent of D.R. Horton's net income during 2003—a year in which D.R. Horton's stock appreciated 153 percent.

In terms of cash compensation (salary and bonus) as a percentage of net income, the top three were William Lyon of Newport Beach, Calif.-based William Lyon Homes (9.9 percent), Douglas Borror of Dublin, Ohio-based Dominion Homes (8.7 percent), and Toll (8.2 percent). At the bottom of the list were Ian Cockwell of Del Mar, Calif.-based Brookfield Homes (0.4 percent), Richard Dugas of Bloomfield Hills, Mich.-based Pulte Homes (0.6 percent), and NVR's Schar (0.8 percent).

Cause For Concern According to Zelman's report on 2002 compensation, the highest-paid builder CEOs earned considerably more than CEOs at large corporations such as General Electric and Microsoft. While this trend continued in 2003, is it cause for concern?

Not necessarily, says David Larcker, Ernst & Young professor of accounting and expert on executive compensation at the Wharton School of the University of Pennsylvania. For example, Robert Toll founded the company he now leads, and “It is difficult to compare the compensation of someone that was a founder of a successful business with that of someone that was hired to run a company from the outside.” According to Larcker, “The actual value created by a founder is easier to compute … . In addition, the founder was probably underpaid in early years and now is collecting the benefits from their work with high pay levels.”

Learn more about markets featured in this article: Los Angeles, CA.