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Investors question CEO pay

Jan 31, 2005 12:00 PM, By Ed Gubbins

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As the telecom industry recovers, some large companies are upping management pay, such as the raise awarded to Verizon Communications Chief Executive Ivan Seidenberg last week — his first in four years. But executive bonuses are drawing increased scrutiny from investors, according to compensation experts.

For 2004, a year in which AT&T's revenue dropped almost 12% and its net loss more than tripled to $6.1 billion, CEO David Dorman received a nearly $2 million bonus, the company announced last week. Dorman's bonus is based half on AT&T's revenue and half on its net income, but the board's compensation committee can also modify the bonus 25% in either direction based on “competitive performance.”

Dorman's 2004 bonus was down 26% from the year before, but it would have been even smaller had the board not changed its method of calculating bonuses in order to exclude one-time restructuring charges from the company's 2004 earnings. Minus the costs of last year's layoffs and asset write-offs, AT&T earned $1.8 billion in net income for the year, which formed the basis of Dorman's bonus. Such decisions are increasingly drawing focus from investors.

Corporate governance regulation brought sweeping reforms in the wake of the Enron and WorldCom scandals, but executive compensation largely eluded regulatory reform, said Carol Bowie, governance research director for the Investor Responsibility Research Center. As a result, investors and unions sought reform through shareholder proposals that have typically focused on capping executive severance and retirement and on excluding retirement fund income from executive bonus formulas. Institutional investors who routinely rubber-stamp compensation plans (some plans earn tax benefits for shareholder approval) are now asking questions, Bowie said.

“For the first time this year, investors are scrutinizing the plans themselves, saying, ‘Wait a minute, what am I approving here?’” she said. “Executive pay is definitely the biggest issue right now for shareholders.”

In late December, Lucent Technologies' board more than doubled the total compensation package of its CEO, Pat Russo, to about $13.6 million (including stock, options and a $2.95-million bonus). The raise was clearly a reward for Russo's role in delivering Lucent's first profitable year since 2000. But critics — such as Joanne Raschke, a shareholder and retiree's wife who is proposing Lucent's executive pay be based more on performance — point out that Russo was well-paid during Lucent's leaner years, too, earning more than $40 million in her first two years on the job (including stock options), while the company's stock dropped 40%. If CEOs earn retention pay when times are tough and reward bonuses when conditions improve, shareholders may wonder to what extent CEO compensation is truly performance-based. In response to Raschke, Lucent argued that all of Russo's stock-based compensation is “inherently performance-based” because its value depends on the company's success. And in response to angry retirees whose benefits have been cut, the company defended Russo's compensation on its Web site as “comparable” to that of her peers, adding, “We need talented people to run the company and have to pay competitively to attract and retain our leaders. If not, these talented people will work elsewhere, which the company cannot afford to let happen.”

Still, Lucent and other large firms can expect more questions on the subject, said Dan Moynihan, a principal with consultancy Compensation Resources. “We're going through a lot of compensation reform right now,” he said. “In another 12 to 18 months, I'd imagine we're going to see a lot better disclosure of the hows, whys and what-fors that are driving the pay. It's a response to shareholders saying, ‘We see these several-million-dollar packages. What are we getting for that?’”