Despite economic downturn, home building and manufacturing CEOs clean up on executive pay rates.

By Daniel Walker Guido

Regardless of a market that continues to hover on the edge of a recession, salaries for the CEOs of home building companies, manufactured housing firms, and building product manufacturers increased an average of 8 percent in 2000.

The pay increases came as earnings per share and pretax income for these companies on average increased 10.2 percent and 5.5 percent respectively. Shareholders also fared well as the average stock prices for those companies increased nearly 14 percent.

Those are the results of an annual review of CEO pay by home building analyst Ivy Zelman for Wall Street investment bank Credit Suisse First Boston.

Some companies paid their top executives very well, despite whether performance for the company as a whole was up or down. While none of the home building analysts on Wall Street would comment on the record as to why that happens, one suggested it occurs for two primary reasons.

"The first is that most board members are friendly to the company and don't want to rock the boat," the analyst said. "The second reason is that depending on what region you operate in, the market is up or down. Some areas of the nation are not doing well right now, and board members take that into account."

When you separate out the industries, the home building CEOs really cleaned up, earning a 20 percent increase in cash compensation over their pay scales in 1999, Zelman found. The average increases in cash compensation for the manufactured housing and building products CEOs were 1 percent and 2 percent, respectively, while shareholders earned a return of -43 percent in manufactured housing and -6 percent in building products companies.

"In our study this year, we found the highest paid industry group relative to firm value was the home builders, with CEOs receiving on average 0.24 percent of firm value," Zelman remarks. "The lowest paid group was the building products people, with CEOs earning only .07 percent of firm value and .08 percent of sales."

Relative to firm value, Irving Schottenstein, CEO of M/I Schottenstein, was the highest paid CEO. His 2000 salary and cash bonus was 0.68 percent of firm value. This ratio was remarkably high considering that the average ratio of compensation as a percentage to firm value and sales was 0.17 percent. The second highest paid CEO on a firm value basis was Larry Mizel, of MDC Holdings, whose 2000 salary was 0.55 percent of firm value.

"On an absolute basis, the seven highest paid CEOs for 2000 each belonged to the home building sector," Zelman says. "They were led by Larry Mizel of MDC Holdings, Bob Toll of Toll Brothers, and Bruce Karatz of KB Home, who were compensated $5.9, $5.4, and $5.2 million, respectively." The lowest paid CEO overall was Terry Trexler of Nobility Homes, who was paid $134,000.

The study found the largest disparities between share price performance and compensation increases occurred at the manufactured housing companies Champion and Oakwood, where Walter Young and William Edwards received increases in compensation of 50 percent and 61 percent, respectively, despite share price declines of 68 percent and 67 percent. Conversely, Dwight Schar, CEO of builder NVR, received an increase in compensation of only 12 percent, despite an increase in share price of 159 percent.

The study found that each of the 14 lowest paid executives of all three industries experienced a decrease in their return on capital in fiscal year 2000. Of the 24 companies whose return on capital decreased, only seven increased the compensation paid to their CEO by more than 10 percent. Mysteriously, D.R. Horton CEO Donald Tomnitz received a 29 percent decrease in compensation, despite a 45 percent increase in share price.

There were also several deviations in compensation for the manufactured housing executives, who realized on average a 52 percent decline in earnings per share and a 43 percent decline in stock price, but actually received a 1 percent increase in salary and cash bonus. Zelman says she had no explanation of why that happened.

Bob Toll of Toll Brothers received the largest increase in salary and cash bonus in 2000. This dramatic increase of 126 percent was in line with pretax income increasing 42 percent and the share price of Toll Brothers appreciating 86 percent. In fact, with the exception of Phil Dion of Del Webb and Tomnitz of D.R. Horton, each home building CEO received an increase in cash compensation for 2000, the lowest increase being 12 percent, the study found.

Knowing the salaries paid to the top CEOs is important to other builders, says Stephen Porten, CEO of Porten Cos., a Maryland builder of single-family homes in the $400,000-plus price range.

"As the CEO of a privately held company, learning the compensation of the national CEOs reminds me that I must make the lion's share of my income by maximizing the yield on every project I build, because it is not feasible to pay myself the type of salary the nationals pay," Porten says. Plus, he notes, "It is imperative for me to have a good sense of the compensation at the divisional and regional level of the larger national companies, because we compete with those nationals to hire executives at our company."

Most executives have annual, short-term, and long-term compensation plans. Zelman's analysis focused primarily on annual salary and cash bonuses, as stock options and restricted stock typically represent compensation for more than one year of service. Many executives also receive the bulk of their compensation in the form of restricted stock. For example, Robert Burgess of Pulte received 81 percent of his total compensation, or $13.04 million, in restricted stock and related arrangements.

"Home building companies tend to rely heavily on earnings per share, pretax income, net income, and return on equity to evaluate performance-based compensation," Zelman explains. "In addition, three companies, Centex, KB Home, and M/I Schottenstein, use customer satisfaction as one decisive factor in compensating their executives."