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Lucent's Fat Cats Get Fatter

Light Reading
News Analysis
Light Reading
12/23/2004
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Yes, it's time for our annual Lucent Technologies Inc. (NYSE: LU) fat cat story (see It's Christmas Time at Lucent and Lucent Fat Cats Gorge in 2002), and the vendor's compensation committee hasn't let us down with this year's bonus awards, handing chairman and CEO Patricia Russo more than $13.6 million in cash and stock.

According to a filing with the Securities and Exchange Commission (SEC) announcing Lucent's 2005 annual general meeting on February 16 in Wilmington, Delaware, "fiscal 2004 was a year of outstanding progress and strong accomplishments across a number of critical fundamentals."

Indeed, Lucent unveiled a profit for its full financial year (ending September 30 2004), its first in four years (see LU Finds New Revenue).

And it has been landing some impressive next-generation network deals, and looks well placed to further benefit from wireless operator consolidation (see Wireless Merger Favors Lucent, Nortel, Lucent Grabs Cingular Action, and Lucent Linked to More Cingular Booty).

Lucent's share price is healthier as a result. At a closing price of $3.78 yesterday (valuing the company at $16.7 billion), Lucent's share price is 32 percent higher than a year ago, when it stood at $2.88.

In the SEC filing, the compensation committee notes that it, and the company's board, "are proud of Lucent’s performance during 2004 and believe that the results achieved are due to the caliber and motivation of all employees and the focus provided by Lucent’s senior leaders."

All of which spells good news for Russo's bank balance. The table below shows her total compensation in 2004 came to more than $13.6 million. That includes a annual cash bonus of $2,950,000, about 2.5 times her base salary.

The size of Russo's annual bonus, states the compensation committee, is "in recognition of the company’s performance and her role in driving those outstanding results."

The table also shows that Russo isn't the only person pulling in multi-million dollar bonuses. CFO Frank D'Amelio ends 2004 more than $6 million to the good.

Table 1: Lucent FY 2004 Salaries, Bonuses & Options

Name Position Salary FY 04 Annual Bonus FY 04 Restricted Stock Award Stock Options Granted
Patricia Russo Chairman, CEO $1.2 million $2.95 million $4.8 million 2.5 million, valued at $4.58 million
Frank D'Amelio CFO $662,500 $4.2 million None 1 million, valued at $1.83 million
James Brewington President, Developing Markets $550,000 $3.06 million None 650,000, valued at $1.19 million
Janet Davidson President, Integrated Network Solutions (INS) $550,000 $3.06 million None 650,000, valued at $1.19 million
Bill O'Shea President, Bell Labs $700,000 $2.86 million None 700,000, valued at $1.282 million
Source: Lucent SEC filing




The compensation committee is gushing in its praise of Russo. It says that under her leadership, "Lucent is positioned to be the industry’s thought leader in next-generation convergence, with the company growing or maintaining share during 2004 in a number of key product segments that should enable further growth and expansion at or above the overall market rate over the next few years."

It adds: "In addition, Lucent improved customer satisfaction results for the year, achieved increased employee engagement results in several key areas, and strengthened the leadership team through strategic hiring and various management development initiatives."

But there are concerns about whether Lucent can maintain its run of positive financial form, given the vendor's reliance on pension credits to bolster its bottom line (see Lucent Numbers Raise Pension Question).

Unsurprisingly, the company's pensioners aren't too happy about the size of the executive bonuses. A representative of the Lucent Retirees Organization told New Jersey newspaper The Star-Ledger that the vendor's senior executives are getting bonuses that "most retirees feel is beyond reason, based on what has happened to the retiree benefits."

The retirees have seen their health benefits cut in recent years as Lucent has looked at all ways it can cut its costs, and is seeking an investigation into the company's pension fund (see Lucent Cuts Retiree Healthcare, Lucent Retirees Get the Schacht, and Lucent Retirees Ask SEC for Help).

— Ray Le Maistre, International News Editor, Light Reading

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Bruford
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Bruford,
User Rank: Light Beer
12/5/2012 | 3:30:32 AM
re: Lucent's Fat Cats Get Fatter
I am new at this so please bear with me here...
I, for one, am totally disgusted with the level of compensation provided to Lucen Senior Management. From my perspective, these individuals have done NOTHING to dramatically improve the company's worth. The only thing I have seen from senior management is "expense reduction"...reducing headcount, offshoring (again, head count reduction),benefit reductions for retirees and passing additional cost of benefits to the workers. This is the easy road. There is no vision or direction for Lucent from senior management other than the myoptic idea of "convergence". Its another example of Lucent's inability to be visionary in terms of the market, to create and drive a "shared vision" within the company with clear, concise goals and metrics and, once again, Lucent's late entry into the current cash flow stream- i.e- follow the buck after someone else has led the way.

If management were worth their weight in salt they would be able to steer the ship into clear and profitable harbors. These folks are supposed to be the captains of this ship. Its more like they are pirates taking away the booty after keelhauling the crew.

Lastly, receiving bonuses worth, in Pat Russo's case, 13x her annual salary, is preposterous. There is probably not a rank and file person within Lucent that received a bonus worth anywhere near 13x their salary...the stockholders and employees at Lucent have been taken. There needs to be an uprising by the shareholders to prevent this kind of pilaging. If the stock had risen 1300% I might be more sympathetic to this level of bonus but it didn't so I'm not.
WiserNow
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WiserNow,
User Rank: Light Beer
12/5/2012 | 3:29:15 AM
re: Lucent's Fat Cats Get Fatter
>> Today, the typical engineer's employment options are narrow but not the typical exec's.

Hate to burst your bubble, but exec's have just as tough a time on the street as the regular joe or jane.

There are 50 - 100 jobs for typical engineers for every executive role. So, if you've been looking for several months, multiply that at least 10 times over for the boss. In fact, of the senior management I worked with prior to my company being acquired by Lucent, only a couple currently are employed, though most sincerly would like to be working productively. Almost all the typical engineers have landed something -- if not something exciting and wonderful.

I was an 'E' level at Lucent -- through acquisition. I stuck around as my company was incorporated, but after a while, I exited Lucent for new horizons. Glad I never realized what the 'E' level severance package was -- I can't imaging being a slave, awaiting the liberty offered by FMP.

I had to justify why I'd not left sooner to be a credible candidate. And of course, not every startup makes it.

Having had a senior position makes it difficult to be taken seriously if one applies for a more hands-on role. The "overqualified" word comes up. Of course, people assume your engineering talent has dried up -- if it ever existed.

We're all in this boat together. We had good times and now we have bad ones.



CoolLightGeek
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CoolLightGeek,
User Rank: Light Beer
12/5/2012 | 3:29:14 AM
re: Lucent's Fat Cats Get Fatter
WiserNow,

I should have qualified my statement to the CEO and CFO execs that you see on the podium of fortune 500 earnings calls, not the full set of execs. I think Russo and D'Amielo would not have trouble finding other positions.

You are definitely right most LU execs would find it difficult to move and so would most execs in the telecom industry.

In general, execs have very good networks of contacts to identify opportunities. The implosion of the industry destroyed many of the opportunties.

I can try to empathize with your difficulty in continuing a career in the industry. Executives typically have financial means to get them through tough times. The answer for many may be starting over in another industry and realizing that it will never come again as quickly and easily as it was in the late 90's.

Some people view the late 90's as a VC sponsored corrupt pyramid scheme where only the VCs and the execs made out.

I don't understand your "being a slave" comment. It sounds like you favor being a leader on a team and may have difficulty being contributor on a team knowing that the team will likely shrink.
If so, the current North American telecom industry is probably a difficult place for you to thrive in.

Clearly, some of us had it better in the good times and some of us have it worse in the bad times. But it is best to treat everyone with reasonable respect no matter what their current or previous positions in the industry.

Good luck to you in your future pursuits. And thank you for contributing your thoughts.

CLG
technoboy
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technoboy,
User Rank: Light Beer
12/5/2012 | 12:58:25 AM
re: Lucent's Fat Cats Get Fatter
CLG

You are making a completely irrelevant comparison. Chambers was also paid a dollar until the most recent fiscal year. Is that a useful comparison to make with Russo. We are talking about a company that has lost tens of billions in market value over the last four years and has essentially broken a promise made to retirees who do not have the luxury of even re-entering the job market. All of this under the explanation of cost cutting. Meanwhile the senior executives are raking it in for finally posting a profit. No one is saying they should not be compensated but where are the ethics in cutting someones healthcare who is 70 years old and then turning around and compensating a CEO with over 13 million in cash and prizes!!!!
CoolLightGeek
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CoolLightGeek,
User Rank: Light Beer
12/5/2012 | 12:58:25 AM
re: Lucent's Fat Cats Get Fatter
While I've stated before that I think in general executive compensation is excessive, how about comparing to CSCO Executive packages before slamming LU?

http://www.cbisonline.com/head...
(As of last year)
"Current Cisco Systems CEO John Chambers averaged over $87 million per year over a three-year period according to published reports. That total compensation package is 2,277 times the pay of the average U.S. worker."

I would guess that the LU Exec team has been paid a fraction of what the CSCO team is paid, with the fraction slightly higher than the ratio of the companies' market cap.
CoolLightGeek
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CoolLightGeek,
User Rank: Light Beer
12/5/2012 | 12:58:24 AM
re: Lucent's Fat Cats Get Fatter
"You are making a completely irrelevant comparison."

Technoboy,
Grow up. If you were to decide what the relative compensation packages of Fortune 500 executive teams, what would be the primary factor in total compensation? Wouldn't it be the market cap of the company? Or would you want to tie it to revenue numbers? (Which got McGinn and NT improperly stating revenue numbers and screwing up their companies). Do you have data that shows the LU compensation is out of line?

As I've said before, it would be good if the LU exec's could have shown more compassion and turned around and donated a percentage of their windfalls to LU retirees that are destitute. I do not know their charitable contributions (they may have done this and I don't know it: but then again, I am always skeptical of people who like to draw attention to their contributions).

As to Chambers vs Russo comparision, check out:
http://www.forbes.com/static/e...

Also in another article in Forbes from 5/04:
"Last year San Jose, Calif.-based Cisco granted its top five executives 6 million options, while Lucent granted its top five execs 6.25 million options--though using Black-Scholes methodology, Equilar calculates the value of Cisco's options grants to be $65 million, nearly ten times greater than the value of Lucent's grants."
spelurker
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spelurker,
User Rank: Light Beer
12/5/2012 | 12:58:24 AM
re: Lucent's Fat Cats Get Fatter

While I think LR's reputation for slamming LU is well deserved, I can't fault this article too much.
Though it would be a better article to compare a few companies.

---------------------------------------------
CLG>
CBISONLINE>
"Current Cisco Systems CEO John Chambers averaged over $87 million per year over a three-year period according to published reports. That total compensation package is 2,277 times the pay of the average U.S. worker."
--------------------------------------------
That article is not too informative. My best guess is that they are comparing what Chambers received in combined wages, bonuses, and stock to the average salary (minus benefits & stock) of the average U.S. worker (including Walmart cashiers, etc.)

Chambers got all his money from stock options, and in those 3 years, Cisco has been continually growing in product breadth, maturity, market share, profit, and market cap.

The LU team essentially ran the company into the ground, shed MOST of the product line AND employees, lost market share, and market cap in an unheard-of scale. Then, stopped the collapse as the speeding truck was a hair's breadth from the brick wall.

Kudos for stopping the carnage, and a bonus is probably deserved.
The problem is that these levels of compensation are expected by all involved regardless of performance. Janet's sector lost money -- yet she still got a bonus. Pat would have gotten similar pay if the company was failing. In fact, in previous years, she did.

To put the recent performance of LU into a bigger context, Pat cut her teeth in the services part of the company. When she was given her current job, LU was a product house that disguised itself as a "solutions" company. She doesn't know how to run a product house, or a "solutions" house. So she systematically killed off products and spun off divisions until LU bore a much stronger resemblence to a services company than a product house. Now the company has stabilized, but it is not the company which she was hired to run.

Yes, a company has been saved, but the folks who did so were the ones who created the problems to begin with.

CoolLightGeek
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CoolLightGeek,
User Rank: Light Beer
12/5/2012 | 12:58:23 AM
re: Lucent's Fat Cats Get Fatter
Comparisions are important: Carli Fiorina, former LU exec make over $70M in the last 5 years. Does she deserve that much more than Patti?

http://www.forbes.com/static/e...

http://www.forbes.com/static/e...
technoboy
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technoboy,
User Rank: Light Beer
12/5/2012 | 12:58:22 AM
re: Lucent's Fat Cats Get Fatter
CLG

You can abstain from the personal remarks. It is not a useful part of the discussion. You went after LR because they are pointing out that LU is giving their execs large bonuses while the retirees have their benefits. What is happening at LU in this regard is a valid discussion point. It has nothing to do with what Chamber is making. That is my point. To make a comparison between the Cisco and Lucent and say it is unfair is a separete discussion. Gee the value of the shares granted to Cisco execs is greater. Perhaps that is because the company is doing just a tad bit better.

To net it out. Giving out executive bonuses while retirees are getting screwed is an unethical in my view. Take it or leave it.
CoolLightGeek
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CoolLightGeek,
User Rank: Light Beer
12/5/2012 | 12:58:21 AM
re: Lucent's Fat Cats Get Fatter
So, in your view, LU execs should not take a bonus if they have to cut retiree benefits even if it is critical to the formula of making the company profitable. Do you expect the execs should swear an oath of poverty (or at least disproportionate compensation from their Fortune 500 counterparts) while LU benefits regress to industry norms?
AGAIN, what would you have as the BASIS for determining fair compensation for executives? Your unwillingness to attempt to seriously answer the question indicates a lack of maturity in considering the matter.

I agree that it looks bad to cut US jobs and to cut benefits to retirees, but those actions were a significant part of balancing the company's budget. To be perfectly blunt, Wall Street does not reward companies for being overly concerned about their US employees or retirees.

I don't think the current group of LU execs feels they were responsible for the past financial mess but they do view themselves as critical to the recovery. Execs (like pro sports players) try to get the best compensation deal they can. Are sports players unethical? Do you think it unethical for many funeral homes to be highly profitable?

Chambers has so much Cisco stock, an extra $13M in salary and bonus would mean hardly anything to him. I think the comparisions to Fiorina and other F500 is very relevant.

Execs in general are not overly loyal, unless of course, they built the company from the ground up. Many of us are not surprised when a typical exec "moves on/sells out" to move to more $$ and power- just like Carli did. Or just as the typical engineer did during the bubble.

Today, the typical engineer's employment options are narrow but not the typical exec's.
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