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Fat Cats Feast, Despite Layoffs

Light Reading
News Analysis
Light Reading
9/24/2001

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
http://www.lightreading.com

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Jon Bon Jovi
Jon Bon Jovi
12/4/2012 | 7:49:09 PM
re: Fat Cats Feast, Despite Layoffs
What a pathetic board to have accepted his package.

Someone should challenge him to donate $1m in his first year salary to the WTC firefighters. He'd still have millions left from his first year.

Whatever happened to great corporate chieftains who, out of concern for their companies, took cuts?

Makes me sick...
fk
fk
12/4/2012 | 7:49:08 PM
re: Fat Cats Feast, Despite Layoffs
I've never understood how top executives at companies that are doing poorly can get multi-million dollar bonuses. You have companies that layoff tens of percents of their employees, have sequentially smaller profits (or even losses) and for this the boss gets millions? Sweet work if you can get it.

What are the bonuses for, when the company is hemorraging money? How do they write the contracts for these positions?

1. Wipes self after defecating: $200,000
2. Washes hands: $100,000
3. Loses less than $10M: $1M
4. "Rightsizes" more than 20% of staff: $750,000
5. Gropes less than three subordinates: $350,000
green
green
12/4/2012 | 7:49:07 PM
re: Fat Cats Feast, Despite Layoffs
the price of a good or service is determined by the supply and demand curve. The CEO's like any other employee are doing a service and their compensation is determined by the market dynamics. so instead of complaining like a bunch of commies go out there and get into the top 10%.
read Jack Welche's "Jack straight from the gut" if you have some time left after your whining..
gardner
gardner
12/4/2012 | 7:49:07 PM
re: Fat Cats Feast, Despite Layoffs
I've never understood how top executives at companies that are doing poorly can get multi-million dollar bonuses.

Because people have been conditioned for years to accept a winner take all society. It is an unquestioned assumption of any hierarchical society that the spoils go to those who are high up on the totem pole. It was that way under communism and it is that way under capitalism. Performance is the excuse for allocating the resources unequally but it is merely a pretext and always has been. Every year or so Business Week does front page article about the most overpayed CEOs. They've been doing it for years and will continue to do it until people put their foot down and demand that it be different. I think change is more possible now because knowledge workers are in a better position to argue their case. They are sophisticated and articulate and can refute the fallacies that CEOs and other executives use to make their obscene pay seem like a natural and positive consequence of an efficient market.
loosemoose
loosemoose
12/4/2012 | 7:49:06 PM
re: Fat Cats Feast, Despite Layoffs
An article in one of this summer's issue of the Harvard Business Review tackled this subject.

Seems that most publicly held companies hire Executive Compensation consultants to lead their board's compensation committee. Most of these compensation committees (made up of board members) have very little experience in the human resources area, so it's very easy for a consultant to find reasons to pay these big salaries.

In the end, who is responsible for paying these consultants? The executive getting the big pay off, that's who!

The article's message was that shareholders need to wake up and smell the coffee - often the more the executive takes home, the less the shareholder end up getting.

Face it - we need to return to the days when executives drew a regular salary, and get bonuses ONLY when they do their jobs right - turning a profit. There is only one way to make this happen, don't throw the proxy in the trash - read it and exercise your rights as a shareholder!
Jon Bon Jovi
Jon Bon Jovi
12/4/2012 | 7:49:04 PM
re: Fat Cats Feast, Despite Layoffs
Judging by green's current and past postings, s/he is a self-consumed top level exec sh*tting bricks because s/he is also enjoying inordinate profiteering at the expense of the people who truly deliver the company to success - the engineers and others underneath him/her. We all hope you get your come-uppance soon!

But the question is - does green merit the bonus fk outlines in sh*tting a brick:

"1. Wipes self after defecating: $200,000
2. Washes hands: $100,000"


>>> the price of a good or service is determined by the supply and demand curve. The CEO's like any other employee are doing a service and their compensation is determined by the market dynamics. so instead of complaining like a bunch of commies go out there and get into the top 10%.
read Jack Welche's "Jack straight from the gut" if you have some time left after your whining..
HarveyMudd
HarveyMudd
12/4/2012 | 7:49:01 PM
re: Fat Cats Feast, Despite Layoffs
Hi Men, What do you expect from America. It is a land of corruption. Screw the helpless and poor people.
uncle_optics@yahoo.com
[email protected]
12/4/2012 | 7:49:01 PM
re: Fat Cats Feast, Despite Layoffs
A good CEO should not come cheap. If they deliver results for their shareholders, they should get paid. Capitalism measures success in terms of metrics like P&L, ROI, and shareholder value.

However,

Good CEOs are those that can lead people based on vision, inspiration and calling forth the best in others. You don't need to slash and burn, exploit, threaten or abuse people to get to the promised land. My feeling is that most of the CEOs out there spend too much time reading Tom Peters, Micheal Hammer or even Mr. Welch trying to figure out what it means to manage. A lot of the CEOs in the Optical space were nothing but profiteers with the sole objective of getting to IPO or a pawning off a piece of crap company on larger entities who fell asleep at the switch.
uncle_optics@yahoo.com
[email protected]
12/4/2012 | 7:49:00 PM
re: Fat Cats Feast, Despite Layoffs
Hey Harvey.....


piss off. Why don't you tell us where you hail from and we'll be happy to point out the pimples on your collective butts.
77thlightguy
77thlightguy
12/4/2012 | 7:49:00 PM
re: Fat Cats Feast, Despite Layoffs
You can tell from the postings who knows what they are talking about, and someone just blowing air.

Harvey: I presume you have lost your job. I am sorry for that. Your CEO or manager probably thought that the rest of the company could get along better without your services. Given your ingratitude for being given the job in the first place, I guess I can understand some of his reasons for picking you versus someone else.

Nobody owes you a living, much less a job to pay the rent, and much less a good career, just like nobody owes your company anything.

Where do you think the money in your company comes from? How much of it do you think there is?

If your CEO does not get the company rolling, products out the door for profits, he gets to lose his job too. So if he can't get sales, he has to cut costs. In this market, getting sales is very very hard. Even if he cuts costs, and makes sales, he may lose his job. It may not be good enough to satisfy the companies investors. Yes, I am afraid they get the boot for the markets problems. CEOs are supposed to pull rabbits out of hats.

Do you think CEOs like to sack good people? The answer is no. Even sacking someone that really deserves it is very hard. They may have a family that depends on them. If they are bad, it is really tough, because you know they will have a hard time getting another job.

Grow up...or move to some place in the world that feels it owes you a living just for being alive.

That would be: nowhere.

77
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