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Optical/IP

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
http://www.lightreading.com
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Jon Bon Jovi 12/4/2012 | 7:49:00 PM
re: Fat Cats Feast, Despite Layoffs Hi Harvey:

Why don't you use the return-portion of your ticket to Afghanistan. You should make it back in time for the execution of the week in the Kabul soccer stadium.
rahulak 12/4/2012 | 7:48:57 PM
re: Fat Cats Feast, Despite Layoffs After reading this article and most of the messages, I am convinced that the easiest thing to do in this troubled economic environment is to become a CEO and hit a fortune. Jack Welch, Bill Gates, Scott McNilley, Larry Ellison and even Warren Buffet really appear to me plain luckey to have 'hard working' people who brought their respective companies to their present laurels, obviating any contribution from these do-nothing guys.

So most of us should be doing what is really so obvious. Getting financing is so easy with many 'ignorant' VCs just finding an excuse to throw money at us. Managing investor relations and Wall Street analysts again is a cake walk as they too 'don't-know-anything'. Sales and profits will be taken care of by 'hard working employees who deliver the goods'. In any case, if something goes wrong, you can always fire the 'innocent' employees and continue to 'fleece' the companies! In conclusion, CEO's is an armchair job with fat salaries!

SO WHAT ARE THE CRITICS WAITING FOR? GET YOURSELVES APPOINTED AS CEO OF AN EXISTING COMPANY, ELSE START A COMPANY AND BE THE CEO!!!

LET US FOLKS KNOW HOW YOU FARE ON THIS 'DO-NOTHING' ASSIGNMENT.
GJ 12/4/2012 | 7:48:53 PM
re: Fat Cats Feast, Despite Layoffs isn't who is worth how much or where the grass is greener. The issue is the compensation package. In most companies, the top execs are the only ones who get any kind of option package and most of their income is based on the stock price. If the price tumbles, the self interest of the CEO says to lay off as many as needed to bring the price back up and then sell. Employees suffer, customers suffer, and long term, the shareholders suffer. But that's the way it works and we all know it. So the solution is equally simple - stop giving these people stocks - just pay them a flat salary and maybe corporate America will stop bowing to the whims of a bunch of Wall Street brokers. WOW - a stable economy!
litehearted 12/4/2012 | 7:48:53 PM
re: Fat Cats Feast, Despite Layoffs I bet you love the freedom you have to spew your venom at this time. There are poor and homeless everywhere in the world. Ask your commie and socialists buddies about how well the world treats them. The Afghans do a great job with the helpless and poor. They have made the whole country live in the same economic condition. Helpless and poor.


Hi Men, What do you expect from America. It is a land of corruption. Screw the helpless and poor people.
nobollox 12/4/2012 | 7:48:51 PM
re: Fat Cats Feast, Despite Layoffs The concepts in business are simple, yet cogent. Supply and demand, risk vs reward, visbility vs accountability.

It is a balance of all aspects, whether apparent or disguised. CEO's don't just appear out of nowhere. They have proven track records, the ability to lead people, and a good sense of the overall macro & micro economies. The key to making money is having people and businesses work for you, not you for them.

It is very easy for an engineer to feel disrespected or unfairly compensated with such a huge disparity is wages. However, when do you see that engineers name in the Annual Report of a company. Let's just hypothesize that an engineer sets a goal and does not accomplish it on time. To the outside world, who do you think gets blamed for the pushback in timelines, milestones, sales objectives, relationships with customers, etc. Let's say there are a 500 engineers, 100 sales people, 150 manufacturing people, 12 executives, etc, that to the outside world, has one figurehead and liason. Companies should want a CEO that smybolizes and represents their company. Somebody who can manage/envision/empower/motivate people, not replace a highly educated and seasoned engineer.

I say neither job is easy. It is a matter of scope, responsibility, visibility, reputation, business sense, skill sets and a pervasiveness.

The wage gap may not be fair, but the stress, dedication, lifestyle (family life included, or lack thereof), etc., that follow might not be either. If you happen to be like one of these people are currently an engineer, keep it up, and you won't be for long.

Background about myself - young, non-executive, financial person, working for a large corporation.
leer 12/4/2012 | 7:48:49 PM
re: Fat Cats Feast, Despite Layoffs And if your working 60 hours a week and driving a forklift for $20K a year, you think its absurd that the plant manager is making $150K a year. The difference is the result of ability, motivation and the consequence of choices. Sport figures, actors and CEOGÇÖs make relatively, tremendous amounts of money simply because their execution impacts millions of lives for the better or worse. Very few people are ever paid more then they are worth for very long.
fk 12/4/2012 | 7:48:47 PM
re: Fat Cats Feast, Despite Layoffs Such naivity is charmingly refreshing. You're paid what they think they can get away with paying you. Ability, motivation and choices do factor into things to a greater or lesser degree, but opportunity is at least as important as any of these. Luck is also a much larger contributor to takehome pay than most people would care to admit.

Very few people are ever paid more then they are worth for very long.

This assumes a perfectly efficient market, which, for better or worse, is nonexistent. There are plenty of people, who, like Rich McGinn, get paid much more than they're worth for an inordinate period of time. Consider other market distorting factors, such as membership in a union, which can insulate a non-performer from the consequences of failure to perform. Tenure, in some professions, serves the same purpose. The simple fact of the matter is that the market is imperfect because it is subject to various distortions. At the executive level, the "good old boys' network" can drastically affect one's level of compensation.

In theory, it's all about supply and demand, skill and performance, etc. In practice, there are so many other factors to consider that to consider only the theoretical is hopelessly facile.

loosemoose 12/4/2012 | 7:48:46 PM
re: Fat Cats Feast, Despite Layoffs Getting paid for what you're worth is somewhat dillusional. Going back to the message in my prior posting, corporate boards of public companies have been all too willing to let the man (or very few women) at the top set their own salaries.

Over the past 20 years smart CEOs have been able to find loopholes in compensation and make the best of it. In the meantime, most boards don't have the guts to say "no."

I'm all for everyone getting as much as they deserve, but when the price of a CEO's hefty bonus is to trim 30% of the company's workforce, something is out-of-whack. Sure, in some companies you're getting rid of the lower performing workers, but a lot of time a lot of corporate knowledge is walking out the door.

There will be no solution to this problem until shareholders begin to demand more accountability on the parts of those running the companies. And most shareholders I know only care about buying low and selling high, rather than investing in what they believe is a well-ran company.

LM
Belzebutt 12/4/2012 | 7:48:44 PM
re: Fat Cats Feast, Despite Layoffs 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.

I used to think that too. After reading that article though, it seems to me that most CEOs get paid bonuses no matter what. And these severance packages of millions, plus life-time benefits? You're going by the premise that "the CEO will get fired if he does bad". Excuse me, but how is McGinn's firing package supposed to be a deterrent? It's more like a great reward.

They are supposed to get paid what the market determines they are worth. But it seems like that is not happening at all, it seems like there is very little risk in their job. If their job has so little risk then they get paid way too much, and not because they have special abilities, but because they are part of a little club.

If CEOs were really getting paid market price, I wouldn't complain.
Justathought 12/4/2012 | 7:48:43 PM
re: Fat Cats Feast, Despite Layoffs I completely agree. Just because our large enterprises may have a say on who to pick for our government doesn't mean we're corrupt. To call us inequal when the fine leaders of our industry are paid no more than a modest 500 times the pay of the guy flipping burgers, is outrageous.
And Harvey - don't you dare draw a parallel between the barbarian executions in Kabul and the human way we put people to sleep down in Texas - that would be just too much.

-----------
Hi Harvey:

Why don't you use the return-portion of your ticket to Afghanistan. You should make it back in time for the execution of the week in the Kabul soccer stadium.
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