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
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
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
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
email@example.com and Joann S. Lublin at