Nortel won't say what it's going to do about 'profitability' bonuses paid when the company was losing money

April 28, 2004

2 Min Read
Nortel Silent on Baffling Bonuses

Following the ousting of Nortel Networks Ltd. (NYSE/Toronto: NT) CEO Frank Dunn in a financial scandal, the equipment vendor's executives are mum on Dunn's "return to profitability" bonus plan (see Nortel Dismisses Dunn and Nortel Fires CEO).

Since early 2003, millions of dollars have been paid to Nortel's executives and employees under the premise that the company had become profitable. But, thanks to revelations made by Nortel today, the premise under which those bonuses were paid may have been false.

And, unfortunately, Nortel hasn't disclosed how much has been paid under the program.

"The independent [financial] review is still underway, and we will complete it as soon as possible… So it would be wrong for me to comment on our actions regarding the bonuses paid until that review is completed," said Lynton (Red) Wilson, Nortel's chairman, in a conference call today.

The company's upcoming restatements will wipe out some $250 million in profits reported for 2003. The company reported $499 million in net earnings for that year and now says it is off by half. The net profit Nortel reported for the first half of 2003 should have been a net loss.Nortel wouldn't say much about its current financials, either. But the company did say its cash balance had dropped from $4 billion in December to $3.6 billion in March "primarily due to payments made in the first quarter of 2004 under the Nortel Networks employee incentive compensation plans as well as cash outlays for restructuring and a real estate transaction."

Nortel's "Return to Profitability" bonuses for employees were payable in full when Nortel reached profitability for a single fiscal quarter in 2003, according to the company's SEC filings.

For senior executives, the bonus payout came in three chunks and was quite lucrative. Each bonus was based on an undisclosed multiple of an executive's base salary. Execs got 20 percent of the aggregate potential amount after one profitable quarter, 40 percent after two straight profitable quarters, and 40 percent after four straight profitable quarters, the SEC filings state.

It's noteworthy how "profitability" is defined in Nortel's bonus plan description: The plan counts "positive pro forma earnings from continuing operations" as a profit, so it doesn't acknowledge GAAP earnings.

Nortel's shares ended Wednesday down $1.59 (28.19%) to $4.05 (see Nortel Stock Dives on Dunn Downfall).

— Phil Harvey, News Editor, Light Reading

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