When Albert Met Sallie
At Sallie Mae, the student loan giant, stock options haven't gone out of fashion: In 2001, Sallie Mae CEO Albert Lord made $33.6 million, mostly because he exercised options. Last year, the No. 2 executive at Sallie Mae, Thomas Fitzpatrick, took home $27.2 million in salary, stocks, and bonuses.
Fair enough. But Sallie Mae does not count those compensation expenses as operating costs on its income statement--a practice that is controversial on Wall Street. Corporate-reform advocates say that income from stock options distorts executive pay and dilutes the value of stock held by shareholders; therefore, it should be counted as a cost of compensation. A research report from Morgan Stanley last month estimates that Sallie Mae's earnings would have been 13 percent lower than the $373 million it reported in the second quarter if it had expensed its options. Sallie Mae Senior Vice President Kathleen deLaski says the company isn't required to account for the options and informs investors "what the impact of the options is."
Makeover. Reston, Va.-based Sallie Mae is in the midst of a corporate makeover that began shortly after the government direct-loan program--which threatened Sallie Mae's business--was created in 1993. After Sallie Mae was established by Congress in 1972, it served as a secondary market for student loans, freeing up money for banks to continue lending to more students. But Sallie Mae's status as a government-sponsored company limited its ability to respond to the challenge posed by the direct-loan program, which quickly grabbed a third of the student loan market. In 1995, Lord, who had left the company, led a group of shareholders in a revolt against management. During a two-year boardroom brawl, Lord argued that Sallie Mae needed to originate loans itself and branch out into related businesses in order to compete. Ultimately, that meant cutting its ties to the government. In 1996, Congress gave the go-ahead to privatize. And in July 1997, Lord prevailed as shareholders voted to oust the senior management. He was appointed chief executive. Sallie Mae expects to become fully privatized by 2006.
Sallie Mae quickly diversified. Today, it counts online recruitment, credit cards, insurance, and mortgages among its businesses. Student loans still account for the bulk of its revenues, and it remains the largest in the industry. As of the end of September, it managed $86 billion of the estimated $293 billion in outstanding federally backed student loans. On revenue of $3.4 billion in 2002, Sallie Mae's profit more than doubled to $792 million. Company stock outperformed the S&P 500 by about 40 percent during the past two years and trades at 17 times earnings.
WHAT GOES UP ...
Sallie Mae helped roll back the direct-loan program's market share.
[Complete chart data are not available]
Percentage of market share
1994 3.66 percent; $0.8 billion
2003 29.81 percent; $12.8 billion
Source: Office of Management and Budget
Graphic by USN&WR
This story appears in the October 27, 2003 print edition of U.S. News & World Report.