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