With the hiring of a new CEO, top Lucent execs are guaranteed millions of dollars in bonuses

January 10, 2002

4 Min Read
Execs Bag More Lucent Loot

When is a bonus not a bonus? That question may occur to shareholders, regarding the timing of payments to top executives at Lucent Technologies Inc. (NYSE: LU).

According to a deal signed in early December by Lucent's Chairman and former interim CEO Henry Schacht, Lucent executive VPs Robert Holder and William O'Shea were guaranteed cash payments totaling more than $7 million once Lucent got a new CEO.

These deals kicked in on Monday when Patricia Russo, Lucent's new CEO, arrived (see Lucent's Next Leader). This comes after Lucent officials said at the end of last year that executives would not receive bonuses in 2001 due to the company's poor performance.

The "retention payment plans" approved by Lucent's board were designed to keep the executives on through the company's difficult restructuring period. They were detailed by Schacht in letters dated December 3, 2001. According to the terms of those letters, Holder and O'Shea will now receive retention payments equal to two-times base salary and annual target bonus -- $4,500,000 and $3,080,000, respectively. The executives, who each hold more than 2,500,000 shares of Lucent stock, also were given the opportunity to exercise all their stock options on the award date -- April 22, 2002, or the employment of a new CEO, whichever came first.

Four months isn't a long time to wait before quitting, but that period was dramatically compressed when, on January 7, Russo arrived.

Holder and O'Shea get the money regardless of whether they stay at the company. So Lucent, playing it safe, is giving them each additional equity grants of 500,000 stock options and 500,000 restricted stock units to stay beyond the CEO's hire date. These options and units are set to vest over an unspecified period of time. (Lucent says options typically vest over two to four years.)

The retention deals raise many questions. With the CEO arriving just one month after the letters were written, was this a "retention payment" plan or really a bonus in sheep's clothing? And as it now stands, did the team know the new CEO's arrival was imminent? Can a CEO be hired in one month?

Lucent spokespeople say the plan for the retention bonuses had been conceived back in the spring of 2001, when it appeared that Alcatel SA (NYSE: ALA; Paris: CGEP:PA) might buy the company (see Lucent/Alcatel Rumors Fly and Alcatel, Lucent Throw in the Towel).

"The board realized that the way the severance policy was worded practically forced executives to leave in case of a merger," says Lucent spokesman Bill Price. Lucent had put in place a "rip cord" severance plan for its top team in February 2001, which gave them the option to quit within a specified timeframe if a new CEO arrived or their reporting arranagements changed.

According to Price, the idea of retention bonuses was only documented in December -- in Schacht's letters -- so that it could appear in the company's 2002 proxy statement, which was mailed to shareholders and filed with the SEC on December 28.

"I can't produce a letter showing that the retention payments were planned earlier," Price concedes.

Meanwhile, the company's proxy statement was specific on 2001 bonuses: "Because company performance fell short of our objectives in fiscal 2001... we decided not to award bonuses for company or individual performance until we meet the objectives of our business plan."

Some Wall Street analysts appear tolerant of the current arrangements with Holder and O'Shea. The Lucent execs have earned their wages, they say, whatever form they come in. "Yes, they found a way to give themselves a bonus; but hey, if I were in charge over there, I can't say I wouldn't do the same thing," says one securities analyst, who asked not to be named. "These guys have been the ones trying to stabilize the business in tough conditions, and they deserve to be paid for their efforts."

So far, it looks like there's no threat of Holder and O'Shea leaving Lucent. "Robert and Bill are delighted with Pat's appointment," says a Lucent spokesperson.

Lucent's efforts to incent its top team haven't worked across the board, however. Despite the offer of a $3,300,000 retention payment and other incentives, Ben Verwaayen has accepted the post of CEO British Telecom (BT) (NYSE: BTY), where he starts in February (see BT Snares Lucent Exec). Lucent says it's still in the process of negotiating with Verwaayen over parting compensation.

Lucent also seems to have adopted separate, more traditional, retention bonus arrangements for chief scientist Arun Netravali. His December 3 letter from Henry Schacht indicates that he'll get $1 million -- not payable on Russo's arrival but in two 50 percent installments, one on February 1, 2002, and another on December 1, 2002.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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