Fat Cats Feast, Despite Layoffs

With thousands out of work, CEOs at leading companies are getting sizeable salaries -- and severance packages

September 24, 2001

6 Min Read
Fat Cats Feast, Despite Layoffs

Despite the massive layoffs and cost-cutting measures that many optical networking companies face, some experts say they're not expecting executive salaries to drop much this year.

Instead, as the year wanes and firms prepare financial statements that reveal what their top honchos took home, signs are that the news won't be heartening to many rank-and-filers who've gotten the axe this year. Indeed, it appears companies with the largest pink slip totals are among those paying their CEOs top dollar.

Take the case of Rick Roscitt, who took over as CEO of ADC Telecommunications Inc. (Nasdaq: ADCT) earlier this year (see Rick Roscitt). According to SEC filings, Roscitt negotiated a base salary of $900,000 and a signing bonus of $1,500,000 with ADC's board. He also gets a long-term restricted cash compensation package totalling $5,500,000, of which $1,500,000 will be payable on his first anniversary of employment -- February 15, 2002.

All this and stock options too. Not to mention five weeks of paid vacation. In all, Roscitt's taking away $3,900,000 in basic cash compensation this year -- higher than predecessor William Cadogan, whose cash compensation in 2000 was $2,793,572, including $750,076 in base pay, $1,994,258 in bonuses, and $49,238 in miscellaneous earnings.

Meanwhile, ADC has joined the list of companies who have trimmed over a third of their workforce. By August, ADC had cut 40 percent of its staff, roughly 9,500 employees.

ADC isn't alone, but it's tough to tell just yet whether the public companies in this sector are ready to cut their executives' pay as part of their overall cost reduction programs. In a year of increasingly gloomy forecasts and heavy layoffs, there's some external pressure to do so, but experts give mixed messages about the possibility of major change.

"I'd expect executive pay to go down, but then, I expected it to go down last year as well," says Scott Klinger, an analyst with United for a Fair Economy (UFE), a not-for-profit organization that tracks the gap between America's very wealthy and the rest of the population. He says CEO pay in the U.S. has grown 20 percent in firms that have laid off 1,000 or more workers this year.

For many execs, keeping par with last year's pay would be a boon. Prior to leaving JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU), Kevin Kalkhoven made $738,078 in salary and bonuses and millions of dollars worth of exercised stock options.

When Jozef Straus, the present CEO, took the helm at JDSU, he contracted for a base salary of $500,000, plus an annual bonus of up to 100 percent of his annual salary, dependent on how well he achieves his objectives.

This year, JDSU has cut 15,000 people, 60 percent of its workforce.

John Roth, the CEO of Nortel Networks Corp. (NYSE/Toronto: NT), was awarded $6,773,616 in cash compensation in 2000, including a base salary of $1,104,167, a bonus of $5,636,250, and miscellaneous earnings of $33,199. Nortel won't comment on what Roth will earn this year until its proxy statement is officially published.

This year, Nortel has announced 30,000 layoffs, and word has it, more may be coming (see Nortel: More Layoffs?).

Some companies hint at changes. John Chambers of Cisco Systems Inc. (Nasdaq: CSCO) has stated that he will be taking a base salary of just $1 this year.

These cuts aren't likely to nibble into the boss's wallet too severely. After all, Chambers made $1,000,000 in bonuses last year -- on top of his base salary of $323,319. Sources valued his stock options at more than $100 million.

While Lucent Technologies Inc. (NYSE: LU) hasn't yet published the compensation figures for its present CEO, Henry Schacht, industry sources say it's likely to be different from that of his predecessor Richard A. McGinn, who left under a cloud in October 2000 (see McGinn: McGone). But for Schacht, it won't be tough to undercut the salary levels of the McGinn era and still make a sizeable living. From 1998 through 2000, Lucent's board approved over $20 million in base salary and bonuses for McGinn. That doesn't count miscellaneous additional cash compensation and the value of McGinn's stock.

In fairness, by 2000, Lucent's board, critical of the company's stock performance, had McGinn on short rations, leaving his $1,100,000 base salary unadjusted from the year before and giving him no bonus. But SEC filings issued by Lucent this summer reveal a rich severance package for McGinn, including a $5.5 million cash lump sum, his legal fees paid, and his bank loans covered to the tune of $4.3 million. McGinn also has ongoing pension, life insurance, and retirement benefits with Lucent -- not to mention his stock holdings.

In addition, until December 1, 2001 (unless he gets another job), Lucent will reimburse him for "all reasonable costs incurred by him in obtaining, furnishing and equipping an office at a non-Company location" at up to $9,000 a month.

McGinn's not the only executive who has gotten a good severance deal from Lucent. Deborah Hopkins, the CFO who resigned her post in May (see Lucent CFO Quits, World Yawns), just over one year after she'd joined the company, was awarded a $3,300,000 lump sum this summer. Hopkins will continue to receive medical and dental insurance, car allowance, and financial counseling, paid for by Lucent for two years, if she doesn't get another job first.

All of this was awarded in addition to Hopkins' regular compensation for 2000, which totaled $5,165,298 in base salary, bonuses, and other cash compensation. In total, Hopkins was awarded over $8 million for one year's work -- not counting stock awards and options.

Lucent is certainly not the only company that continues to give out "golden parachutes." According to some U.K. newspapers, Lord Simpson, the ex-CEO of Marconi (see Heads Roll at Marconi), received $1.5 million in severance pay -- even though he has reportedly admitted responsibility for some of the company's latest financial woes. Marconi says the figure isn't valid, as it is still negotiating with Simpson.

Klinger of UFE says none of this is unusual. Top execs command big bucks, regardless of how their companies perform. "We don't see a big relationship between performance delivered and pay," he says.

Indeed, Klinger thinks technology companies may have been particularly hard-hit by a trend he has highlighted in his latest report. Specifically, after studying pay patterns for CEOs nationwide over a three-year period, he says he found a correlation between a company's stock performance and CEOs whose compensation is especially high.

"We found that if companies pay executives too much based on past performance, they tend to take higher risks going forward," he says. For instance, some execs, intent on meeting specific financial targets, are more likely to wind up pushing the limits of legality on accounting practices, or employing severe cost-cutting measures in order to meet specific short-term goals.

"It's a merry-go-round," he says. The upshot, he maintains, is that short-term gains are being sacrificed to strategies that might better benefit companies in the long run.

"CEOs justify their pay packages by saying they generate tremendous wealth for shareholders. But it’s a myth that CEOs are paid for excellence," Klinger wrote in a recent note. "Typically, their companies don’t deliver excellence. Companies with more limited wage gaps are actually better bets for shareholders."

Others say change is in the wind. "There's no doubt that salaries have gone down in general, and that CEO base salaries are getting lower," says Glen Rostie, president of The Network Mine, a search firm for networking professionals. He says any exec looking for a top-level job right now can expect most of his or her compensation to be in the form of bonsuses based on overall company performance.

— Mary Jander, Senior Editor, Light Reading

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