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Verizon Tries to Mute Criticism of CEO Pay
By Phred Dvorak and Joann S. Lublin
The Wall Street Journal
May 3, 2006

To get a sense of the strains on corporate boards these days, look at the gyrations involving executive pay at Verizon Communications Inc.

Last year, Verizon's board granted a long-term stock incentive package to Chief Executive Ivan Seidenberg that would have increased his 2005 compensation 50% from the year before to nearly $27 million.  This past March, directors abruptly canceled a big chunk of that grant, initially valued at $7.6 million, before the increase had been widely publicized.  The board acted -- with Mr. Seidenberg's approval -- amid concern about how shareholders would react to giving him a big raise after Verizon's stock had dropped 25% in 2005.

Director Robert Storey, arguing that Mr. Seidenberg has long been underpaid, says this of the flip-flop, "We thought we'd make it up to him [last year], and maybe we were too enthusiastic."

The U-turn on executive compensation at one of America's biggest telecommunications companies highlights a big challenge for many boards in the post-Enron era:  staying in step with shareholders.  While directors are supposed to represent shareholders and guard their interests, in practice many tend to identify more with the executives they oversee -- a potential problem on issues like compensation.

There are plenty of reasons why board members sympathize with management.  Directors are often current or former CEOs themselves, and they may form close ties with corporate officers, particularly if they have worked together for a long time or have served together on other boards.

At Verizon, 10 of the 13 directors are current or retired CEOs, and 10 have served on the board of Verizon plus a predecessor company of Verizon for more than a decade.  Six directors sit or have sat on other boards with Mr. Seidenberg or other Verizon executives.  And four worked at companies that had business relationships with Verizon or a predecessor.

In the past, such chummy connections were often viewed as assets.  These days, after accounting scandals and reports of skyrocketing CEO pay, they're more likely to be seen as liabilities.  In response, regulators are tightening corporate-governance rules and requiring more disclosure of executive pay, and activist shareholders are trying to wrest more control over such matters from directors.

On Thursday, shareholders representing Verizon's unionized workers and retirees plan to protest at the company's annual meeting in Overland Park, Kan.  They say they're upset because Mr. Seidenberg's compensation rose 12% last year despite the cut in his share grant.  Meanwhile, the Corporate Library, a governance tracker, gives Verizon's board a "D" for effectiveness, citing the decline in Verizon's stock price over the past five years while Mr. Seidenberg was being paid more than $75 million.

Verizon directors say they have been responsive to shareholders, cutting executive perquisites and pay, tightening rules on director independence and restricting severance packages.  "We're trying to align the company with shareholders," says Mr. Seidenberg.

The saga shows how shareholder activists can influence board actions even when their formal resolutions are defeated.  Only one of the 30 resolutions Verizon shareholders have filed in the past five years has won support from a majority of the shares voted.

The stage was set for Verizon's recent flip-flop over executive pay back in 2004, when Mr. Seidenberg decided to ditch his lucrative employment contract.  The contract, created ahead of the 2000 merger that formed Verizon, guaranteed Mr. Seidenberg and co-CEO Charles Lee millions of dollars if the company changed hands and they had to quit -- a provision commonly known as a golden parachute.  But by the end of 2003, Mr. Lee had retired.  And at the May 2003 annual meeting, after years of complaints from activists, 59% of the shares voted had approved a nonbinding resolution to require shareholder approval for big severance payments.

In early 2004, Verizon's board agreed to submit future golden-parachute provisions to a shareholder vote, and Mr. Seidenberg suggested that he work without a contract after his current one expired in June.  That led the four-member board committee that oversees executive compensation to review Mr. Seidenberg's pay package.

The committee, like Verizon's board, included people who knew Mr. Seidenberg well.  Two members -- Chairman Walter Shipley, former CEO of Chase Manhattan Corp., and John Stafford, former CEO of drug maker Wyeth -- were already on the board of Verizon's predecessor, Nynex Corp., when Mr. Seidenberg was named a director in 1991.  A third member, Richard Carrion, the CEO of the Puerto Rico-based financial company Popular Inc., joined the Nynex board in 1995.  At one point in the early 2000s, the four men also served together on Wyeth's board.

Mr. Shipley declined to be interviewed for this article, and aides said Messrs. Stafford and Carrion weren't available to comment.  But Mr. Storey, a retired lawyer who isn't on the compensation committee, says the board was concerned that Mr. Seidenberg was underpaid compared with the CEOs of other telecom companies.  "If you look at your peer companies and your CEO is being underpaid, what message are you sending to the CEO?" Mr. Storey asks.

In January 2005, the board decided to increase Mr. Seidenberg's base salary for the first time in five years -- to $2.1 million from around $1.5 million.  It also gave him a long-term bonus initially valued at around $18.9 million, almost twice his long-term awards in the prior two years.  The bulk of the bonus, $11.3 million, will rise or fall depending on Verizon's operating results and share performance over three years.  Mr. Seidenberg was to have gotten the remaining $7.6 million if he was still on the job at the end of 2007.  At the same time, the board eliminated a rich executive-pension program unpopular with many investors.

Even as the board was approving Mr. Seidenberg's pay raise, Verizon's share price started to slide.  Industry competition was intensifying and the company was spending a lot of money on a controversial plan to deliver TV signals over fiber-optic lines and on the purchase of long-distance carrier MCI Inc.

To demonstrate its concern about the stock price, says Mr. Seidenberg, the board chose to cancel the $7.6 million share grant.  "We didn't want it to be a lightning rod," Mr. Seidenberg says.  He and Mr. Storey argue that the decision shows Verizon's board can make tough calls, even though its members are close colleagues.  Mr. Storey also stresses that the board wasn't punishing Mr. Seidenberg.  Despite the drop in Verizon's share price, Mr. Seidenberg has done a great job guiding the company, Mr. Storey says.

But proxy-advisory firm Institutional Shareholder Services says shareholders may still have cause for concern. Mr. Seidenberg's pay package still "may provide high payouts for mediocre performance," it says.

Write to Phred Dvorak at phred.dvorak@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

http://online.wsj.com/article/SB114661421147242040.html?mod=telecommunications_primary_hs