It was a good year, in 2004, for most of the Inland Northwests publicly traded companies, and their executives, in turn, reaped huge payoffs.


Such executives, on average, saw their overall compensation skyrocket 63 percent in 2004, an annual analysis by the Journal of Business shows. The big jump follows an also unusually high 48 percent rise found in last years study, and is by far the largest increase the Journal has seen in the 12 years in which it has tracked executive pay here.


The analysis of the compensation of 74 executives here found that their average pay, including perks, long-term incentive pay, and gains on exercised stock options, rose sharply to about $693,000 in their employers 2004 fiscal year. That compared with about $422,000 for the same set of executives in the previous year.


While salaries and bonuses alone climbed a heady 24 percent last year, to an average of nearly $390,000, exercised stock options were the bigger reason for the sharp rise in average overall compensation. In all, 29 executives cashed in such options for an average individual gain of $568,000, compared with just 17 executives who did so last year, for an average of $404,400. Going back to fiscal year 2002, when the economy was still reeling, only 10 executives bothered or were in a position to cash in options.


The information for the analysis came from the proxy statements of 16 publicly traded companies in the Spokane area and North Idaho. Public companies are required to file executive pay information annually with the U.S. Securities and Exchange Commission.


Notably, compensation among the mostly highly paid executives on this years list appeared to grow at a much faster rate than for those at the bottom of the list.


For the first time, all of the top 10 executives on the Journals list earned more than $1 million. One made nearly $4 million, three others made more than $3 million, and three more earned more than $2 million. In last years analysis, the highest paid executive on the list made about $2.6 million. Also, medianor midpointcompensation for the overall group grew just 12 percent, to about $390,000, roughly $300,000 less than the average overall pay. The lowest-paid executive on this years list made just over $100,000 and received about 9 percent more pay than in the previous year.


By comparison, the annual Wall Street Journal/Mercer study of U.S. CEO compensation showed an about 41 percent jump in pay for fiscal 2004. That study, reported in the Wall Street Journal in April, includes just CEOs, rather than all top executives whose reported pay is in proxies.


Also noteworthy is that, collectively, the companies included in the Journal of Business analysis provided their shareholders with a total return on investment of about 30 percent last year, counting share-price increases and dividends, according to information gleaned from the proxies.


The list


Topping the Journals list of 40 highest-paid public-company employees this year is Penn Siegel, chairman and CEO of Spokane-based Potlatch Corp., who, thanks partly to stock-option gains of nearly $2.4 million, had total compensation of about $3.9 million. Siegel ranked No. 8 on last years list.


Moving up one spot to No. 2 this year was Harold Gilkey, chairman and CEO of Spokane-based Sterling Financial Corp., with overall compensation of $3.2 million. Gilkey exercised stock options for a gain of about $1.9 million and also received about $377,000 toward a supplemental retirement plan.


Rounding out the top five were Ambassadors Group Inc. President and CEO Jeffrey Thomas, with overall compensation of nearly $3.2 million; Sterling Savings Bank Chairman and CEO William Zuppe, at $3 million; and Coldwater Creek Inc. President and Chief Merchandising Officer Georgia Shonk-Simmons, at $2.3 million.


Thomas, who last year ranked No. 28 on the list, received $1.3 million in restricted stock and exercised stock options for a gain of about $827,000, in addition to his $278,000 salary and $731,000 bonus for the year. Overall, that amounted to a pay boost of about 667 percent. Zuppe, who heads the banking unit of Sterling Financial, exercised stock options for a gain of about $2.2 million.


Others who made at least $1 million in 2004 were AmericanWest Bancorp.s Wes Colley (now retired), Coldwater Creeks Dennis Pence, Sterlings David Bobbitt, Potlatchs Richard Kelly, Idaho Independent Banks Jack Gustavel, and Coeur dAlene Mines Corp.s Dennis Wheeler.


The big increases come at a time when companies increasingly are tailoring their compensation packages to focus more on performance, says longtime Spokane headhunter Jeannine Marx. Executives, Marx says, appear to be rising to those expectations.


Executives are maximizing their opportunities and reaping the benefits, she says.


The increases also are a product of the improving economy here, especially because of continued attractive interest rates and robust real estate and finance markets, Marx says.


If you had construction and development companies in the region that were publicly traded, youd see a few of their names at the top of this list, she says.


Better bonuses


About 80 percent of the executives in this years analysis received a boost in salary and bonus. Only a handful received no bonus at all. The biggest bonus, at about $1.3 million, went to Pence, Sandpoint-based Coldwater Creeks co-founder, chairman, and CEO. Others to get big bonuses included Coldwater Creeks Shonk-Simmons, at about $895,000; Potlatchs Siegel, at $880,000; and Ambassadors Thomas.


The average bonus in 2004 was about $150,000, compared with about $100,000 in 2003.


Bonuses almost always are tied to specific performance goals that an executiveand sometimes an entire companymust achieve. With most companies here doing relatively well last year, that meant more bonuses.


We paid bonuses at the highest level I can remember, says Christopher Kit Eckel, vice president of human resources at Potlatch.


Not everyone got a boost in pay last year. Taking into account just salary and bonus, the senior executives at both Hecla Mining Co. and Coeur dAlene Mines all took pay cuts in 2004, due mostly to smaller bonuses. Most of those executives saw their overall pay decline as well. That might seem appropriate to shareholders, since total shareholder return (TSR) at both Hecla and Coeur fell markedly in 2004, following big gains the year before.


The only other company to report an overall decrease in compensation for its top execs was Key Tronic Corp., the Spokane-based electronics manufacturer. There, some executives saw bigger paychecks, while others saw declines, and collectively their pay fell about 1.6 percent.


Judging which industry seemed to do the best is difficult, since there are so few publicly traded companies in the Inland Northwest.


Executives in the hospitality industry, for instance, appeared to do best, at an average overall compensation increase of about 258 percent, but that was driven almost entirely by Ambassadors Group, the Spokane-based specialty travel organizer, rather than by Spokane hotelier WestCoast Hospitality Corp., which traditionally has been relatively conservative in its executive compensation. The only retailer in the mix, Coldwater Creek, had an average overall pay boost of 115 percent, but its TSR last year was a whopping about 180 percent.


Banks are probably the biggest contingent among public companies here, and their executives did well in 2004, with an average increase of about 75 percent. Exec pay in the natural resources sectormining and lumber companiesgrew an average of about 45 percent, despite lagging increases at Hecla and Coeur.


The lowest overall increase came in technology, where Key Tronic, Itron Inc., and Lifestream Technologies Inc. executives collectively saw their pay grow just 6.8 percent.


I find it sad and disappointing that you arent seeing more technology companies rising into the top 10, says Marx, who specializes in finding senior managers for the technology industry.


She says the tech industry continues to be soft because companies that buy technology have been looking more critically at such expenses, and have learned to delay or do without some purchases they might have made more quickly in the 1990s.


Stock options


Improving stock prices at Inland Northwest companies apparently gave executives here strong incentiveand in some cases, the abilityto exercise stock options that had been granted to them earlier.


Collectively, the 29 executives who exercised options last year reaped a gain of about $16.5 million.


I believe its pent-up demand, says Potlatchs Eckel. We have a number of executives that have not had the opportunity to exercise their stock options, and they did so last year.


Whether companies will continue to grant such options at the volumes they have in the past is unclear.


Its been widely thought that corporations would begin cutting back on granting stock options because of new rules that soon that will require companies to expense the value of such options, and because they also are employing other new incentive pay strategies. That expected trend was evidenced in last years analysis, which showed a 24 percent decrease in new stock option grants, but stock options in this years analysis shot up dramatically, indicating continued strong interest in that form of compensation.


With a stock option, a company grants an executive the right to buy a certain number of common shares within a set period at a specified, frozen price. The exercise price typically is set at the market price for the stock on the day the option is granted. If the stock price then climbs, the executive can exercise the option to buy those shares at the lower exercise price, and reap a gain.


WestCoast Hospitality President and CEO Art Coffey, for instance, was granted options to buy 250,000 shares of common stock last year at an exercise price of $5.10 a share. With WestCoasts share price currently hovering around $6.80 a share, Coffey could net a profit of about $425,000 if he were able to exercise them today. Most options, however, mature over time, so that share-price margin would have to hold until they do.


If a stock doesnt climb, or falls, however, stock options have no value at all, and are referred to as being under water. Take, for example, options to buy 40,000 shares each granted to Sterlings Gilkey and Zuppe. The exercise price on those shares is $40.07, but the companys shares currently are trading at about $35.50, which puts those options under water unless the share price rebounds above the exercise price.


Relatively few executives tracked in this analysis received restricted stock, which are shares of stock given outright to an executive, usually with restrictions on when they can be sold. One of them was Ambassadors Thomas, who received $1.3 million worth last November. Those shares vest over four years.


Theres plenty of stock-option money still on the table. As of the close of the companies 2004 fiscal years, the 75 executives included in this analysis had a combined $61 million in gains available to them in exercisable, in the money options, and another $16 million in gains from options that werent exercisable due to rules attached to them or because they were under water at the time.


Eckel says public company boards are becoming much more diligent about creating compensation packages that push executives to think long term and always to keep shareholder return in mind.


Beginning in late 2003, Potlatch began granting what are called performance share grants to certain employees. Those grants sit for a three-year period, after which they can be granted to the executive in the form of stock and accrued dividends depending on how well the company rewarded its shareholders during the period in comparison with Potlatchs peers in the industry.


If Potlatchs total shareholder return during that performance period falls below the 34th percentile among its peers, the executive gets nothing. Above that level, theres a sliding scale with greater rewards for greater corporate performance.


Everything is based on providing a return to our shareholders, Eckel says. We take that very seriously.


Other companies, including Spokane-based energy company Avista Corp. have implemented similar compensation programs.