While Lucent Technologies Inc. (NYSE: LU) trimmed its workforce by the thousands and sold off pieces of its business to pay off its debt, company executives have been reaping the benefits of a deal they struck late last year before the new CEO Patricia Russo came on board (see Lucent Proposes Reverse Stock Split).

According to a shareholder proxy statement issued late yesterday for the company’s annual meeting in February 2003, Lucent revealed that at least four top executives were given multimillion-dollar packages in fiscal 2002. Executives were also given salary increases along with other expensive perks. Russo was the only executive to officially get a bonus.

"This looks excessive," says Steven D. Levy, an analyst with Lehman Brothers.

Patricia Russo, who took her post as the company’s CEO on January 6th, 2002, made out better than most (see Lucent's Next Leader). Along with her annual base salary of $1.2 million, she also received a guaranteed $1.8 million bonus. This payment was part of her initial employment package to compensate her for opportunities she forfeited when she left her former employer, Eastman Kodak Company, according to the proxy.

In the future, she is eligible for annual incentive awards at a target equal to 150 percent of her base salary. But the company emphasizes that she doesn’t have a guaranteed annual award for 2003. In addition to the cash and salary benefits, Russo was also given a hiring package that included nearly 3 million shares of stock options and about 1 million shares of restricted stock. Additionally, she received 2 million stock options and 500,000 restricted stock units as part of the company’s equity incentive plan. In total, her restricted stock units were valued at $11 million based on Lucent’s stock price of $7.10 when the units were granted.

But Russo isn’t the only executive who lined her pockets in 2002. At least five other top executives received bonuses and/or special perks amounting to millions of dollars during the year. And all of them were given raises.

Even though the company did not give out performance bonuses to executives in fiscal 2002, it doled out retention bonuses to key officers during Russo’s transition. These bonuses were disclosed in the 2001 proxy. Robert C. Holder, COO, received a retention payment of $4.5 million; William T. O’Shea, executive vice president of corporate strategy and business development got $3.08 million; Frank D'Amelio, executive vice president and CFO, received $3 million; and Richard Rawson, senior vice president and general counsel, got $2.31 million to stick with the company through April 2002. They also received full vesting of their current outstanding stock options and restricted stock units.

Lucent points out that it has set aside a funding pool for annual incentive awards, which it intends to pay out to non-executive level employees in fiscal 2003.

These execs also got raises. Even as revenues continued to fall and thousands of employees were laid off, the board agreed last year to increase salaries for top executives. Henry Schacht, the current chairman of the board and former CEO, got a salary increase of over $100,000, boosting his annual salary up to $1.1 million. Robert Holder saw the biggest salary increase from $708,000 in fiscal 2001 to $900,000 in 2002.

The company justifies these salary increases by pointing to the expanded roles that these executives have taken as the company has restructured, according to the proxy.

But bonuses and increased salaries aren’t the only benefits enjoyed by Lucent’s executive team. Schacht had his 2002 chauffeur services paid for to the tune of $26,425. (This was down from 2001, when his chauffeur cost $35,141.) He also had tax reimbursement for certain fringe benefits in the amount of $27,978; and he received financial counseling services valued at $26,351 and tax reimbursement for certain fringe benefits in the amount of $57,325 in 2001.

Don’t think the good times end when these execs leave the company. They all are eligible for sweet severance packages along with a nice little pension program. Assuming their current positions and retirement at age 65, Russo can expect about $1.1 million annually; Holder $674,754; O’Shea $690,236; D’Amelio $766,753; and Rawson $543,884.

Even if Russo leaves or retires early, she has a special provision in her contract that provides a minimum annual pension of $740,000, provided she remains employed with Lucent for five years.

Lehman's Levy says that in today’s market condition, it would be difficult for Lucent to justify these kinds of incentives this year.

Lucent also gave more information about the terms of its proposed stock split in the proxy released yesterday. The proposal gives Lucent's board discretion for a reverse split at ratios of 1-for-10, 1-for-20, 1-for-30, or 1-for-40, anytime before February 19, 2004. The company proposed the reverse stock split after it received a warning from the New York Stock Exchange that it risked delisting because its stock had traded below $1 for 30 consecutive days (see Lucent Proposes Reverse Stock Split). But lately, the company’s stock has rebounded, trading around $1.75 a share, leaving some analysts wondering if the company will actually go through with the split.

Lucent is trading down today $0.13 (6.88%) to $1.76.

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.com