Why I Don't Take a Salary - and No, I'm Not Crazy - Brief Article

Chief Executive, The, August, 2001 by Richard D. Fairbank

About six years ago, Stanley Westreich, the head of Capital One's compensation committee, asked me if I was enjoying my job. I said that while I was having a fabulous time running Capital One, I was sometimes a bit wistful for the early days when we, as entrepreneurial pioneers, put everything on the line to launch the company and make it a success.

That conversation led to the creation of our performance-based option program, aptly named EntrepreneurGrant, which gives executives the opportunity to trade a portion of their fixed compensation for performance-based options. The options involved in each grant vest only when the stock rises a compounded 20 percent per year over three years. More than 90 percent of the several hundred senior executives at Capital One who are eligible for the program have participated.

Our president, Nigel Morris, and I traded in all our fixed compensation (salary bonus, executive retirement plan contributions) for these grants. If the company's stock goes up significantly, we get paid. If it doesn't, we get nothing. As you might expect, the idea took some getting used to--and raised a few eyebrows among my peers. One well-known Fortune 500 CEO told a mutual acquaintance, "Fairbank must be out of his mind."

But we believed in what we were doing. Our board had lengthy discussions about the new model before we implemented it, and we had help from board member Jim Kinsey. As cofounder and former CEO of AOL, Jim had first-hand experience watching options grow over time to reflect the hard work of the company's workforce. His insight helped us see how this could work to the benefit of Capital One's executives, associates, and shareholders.

There have been some bumps in the road, to be sure. After our first grant the stock went nowhere for a year-somewhat inexplicably, given our good earnings performance. Then the price suddenly shot up, and the options vested within a few months. In 1997, our stock price fell 50 percent in three days. Although that was attributable to a broad market decline, it was still unsettling given how much was on the line, not just for Nigel and me, but also for our executives, our associates (who were invested in the company through our stock purchase plan and options program), and our shareholders. We are constantly reminded that being an entrepreneur is not necessarily about what happens today, but about building something for the long term. We've found that if we deliver the earnings, the stock price will eventually follow.

Since our IPO in November 1994, our stock has gone up about 1,100 percent. We've had four grants, three of which have vested, and we're working on the fourth. Our stock's strong performance has translated into healthy profits for the company's leadership, but even more important, it has helped our associates and shareholders send their children to college and purchase homes. We all took a chance on the company and it's paying off.

People have asked me why we would take on market risk on top of accountability for company performance. My answer is that our shareholders are taking that risk, and there's no good reason why, as the CEO, I shouldn't bear it as well. In many cases, people are putting a good part of their life savings into Capital One and I don't believe I should be paid a huge salary if their investment isn't performing well. And Wall Street seems to love our strategy; every time we've announced a grant, our stock price has gone up.

This program has helped fuel the kind of entrepreneurial excitement we were looking for at Capital One. It gives our people a sense that what they do and how well they do it directly impacts the success of the company. Our approach might not be right for everyone, but I think CEOs at most companies should at least consider compensation that is more closely aligned with shareholder return. Moving in that direction sends a powerful message about your commitment and belief in the future. It can be a little scary stepping up to the plate, but the reward can be enormous.

Richard D. Fairbank is chairman, CEO, and co-founder of Falls Church, VA-based Capital One Financial Corp., a Fortune 500 company with revenues of $4.97 billion in 2000. Freelance writer Peter Haapanie co-wrote this piece.