Lucent Shareholders Rebel

In a suprising turn of events, Lucent Technologies Inc. (NYSE: LU) shareholders led a rebellion against Lucent's Board of Directors this morning, approving measures designed to tighten up the performance requirements for executive pay at the company. (SeeLucent Exec Pay Faces Proxy Vote.)

In supporting a proxy measure supported by the Lucent Retirees Organization, shareholders at this morning's annual meeting approved two measures that could ultimately reduce the incentive pay of Lucent's top management, including Chairman and CEO Pat Russo. The vote went against the recommendations of Lucent's Board of Directors.

The vote on proxy items #6 and #7 was approved by respective margins of 54 percent and 53 percent. Proxy item #6 said that 75 percent of executive compenstation needs to be linked to performance. Proxy item #7 said that the use of pension credit accounting could not be used in setting incentive executive pay. In 2005, pension credits, derived from calculated surpluses generated by the performances of Lucent's pension funds, contributed substantially to Lucent's net profits. (See Pension Concerns Hit Lucent.)

The development is surprising in that a similar effort to make changes to Lucent's compensation structure failed in the shareholder meeting in 2005.

In Lucent's annual report filed in December of 2005, the Board of Directors filed a long response to proxy items #6 and #7, explaining that Russo's compensation was justified in view of the company's performance.

The board argued that because most of Russo's compensation came in the form of stock options that are priced higher than the market price today, she has not been compensated as highly as it would appear, because she cannot exercise or sell those shares:

    Since returning to Lucent in January 2002, Ms. Russo has received stock options covering about 12.6 million shares and 4.3 million restricted shares. A portion of these shares were awarded to replace compensation she forfeited upon leaving her former employer and the remainder to provide her with an incentive to drive performance that will increase shareowner value over the long term. While the attributed value of these stock option awards at grant is over $29 million, Ms. Russo has approximately $17 million of this value related to stock options that have an exercise price of $6.26 per share and, therefore, cannot be exercised at a profit unless the price of Lucent's stock exceeds that exercise price prior to the expiration of the grants. In addition, as shown on page 44, the total value of all of Ms. Russo's stock option grants, assuming exercise, as of September 30, 2005, was $4,675,000, of which only $2,312,500 related to vested options and the remaining to unvested option grants. The value Ms. Russo ultimately receives from all of her option grants will depend upon the future price of Lucent's stock at the time she exercises the options.
The measures do not effect Russo's base salary, which stands at $1.2 million per year. It's not yet clear which of the formulas will be used to determine incentive executive pay in 2006, or how much Lucent executives stand to lose.

Much of this morning's shareholder meeting, which lasted under three hours, featured angry tirades against Russo by Lucent retirees. Shareholders also voiced concerns about the stability of Lucent's pension plan.

"Your stock should be at 150 and it should be splitting 3-for-1. Under Rich McGinn it was at 80," said one shareholder. "Why is it at $2.30?... Richard was the worst -- he had a great big Irish smile and a phony attitude. I invested and lost. You are only here as a fall man for Rich McGinn. If you were a good firm the stock price would be higher."

Russo took much of the abuse calmly, attributing many of Lucent's troubles to a general "industry downturn." Yet towards the end of the meeting, it was clear she was growing frustrated with ongoing criticism and questions about the stability of Lucent's pension plan.

"It's not just what happened to Lucent, it's what happened to the industry," said Russo, in explaining why Lucent's stock collapsed. As for the pension plans, Russo said they were fine. "Under law our pension plans are adequately funded. I accept your input. I got it."

While the shareholders' voices have been heard, it's not yet clear whether the Board will observe the vote's mandate.

Among the other proxy items being voted on, the shareholders approved a measure giving the Board of Directors the option to declare a reverse stock split.

— R. Scott Raynovich, US Editor, Light Reading

optiplayer 12/5/2012 | 4:06:01 AM
re: Lucent Shareholders Rebel According to the WSJ this morning, a similar proposal did pass last year but it achieved only 50.2% of the VOTES CAST. Apparently, the BoD has the discretion to treat abstentions as "no" votes so when the abstentions were added to the "no" vote the proposal was shot down. (a clear example of why it is important for all shareholders to vote, even if one only has a few shares).

Did this year's proposals achieve 53-54% of votes cast or all shares outstanding?

The BoD seems to believe that the options granted to management have no value (Black-Scholes says otherwise). If that is the case, then management should have no problem giving them up!!
Stevery 12/5/2012 | 4:06:00 AM
re: Lucent Shareholders Rebel My reading: the options pricing discussion is 1/2 of a red herring.

She got 4.3 million restricted shares, which is still a CHUNK of dough. And this for CRUSHING the share price.

Nice work if you can find it.
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