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Verizon Ties CEO Pay to Project Success Instead of Company Stock Performance
By Sara Silver
The Wall Street Journal
Wednesday, October 18, 2006

Verizon Communications Inc. used to give its chief executive officer long-term rewards based on the performance of the company's stock.

Now that the company has undertaken a major investment that will take years to increase the bottom line, the New York telecommunications giant is taking a different approach.  It has decided to tie part of the compensation for CEO Ivan Seidenberg to attaining certain strategic objectives.

The change is contentious.  While some compensation specialists praise the move as pay for performance, others question the timing.  Meanwhile, investors may go on a bumpy ride.

The stock took a pounding last year, sliding more than 25% on the New York Stock Exchange, amid investor concern about the long-term profitability of telephone companies.  Closing at $36.59 yesterday, it has come back somewhat, but the shares were trading at more than $40 in late 2004.

Verizon plans to spend nearly $23 billion between 2004 and 2010 to bring fiber-optic cable into customers' homes and businesses, which will replace copper-wire technology that has been in use for more than a century and allow it to offer video and much higher-speed Internet access.  The company expects to save nearly $5 billion from not having to maintain traditional copper wires during that period.

Profitability estimates are based on attracting up to seven million Internet customers and four million television customers to the new service by the end of 2010.  The company has told investors to expect operating profits from the project in 2009.

Under the new incentive-compensation plan approved by the board in March, Mr. Seidenberg gave up a restricted-stock grant worth $7.6 million for 2005, which he would have received if he stayed on the job through 2007, in return for what could be more than $22 million in stock if all goals are met.

Mr. Seidenberg would be eligible for Verizon shares initially valued at more than $11 million based on the return to shareholders, which includes the stock price and dividends.  He could receive all of them if the return is among the top 20% of companies in the Standard & Poor's 500-stock index and its peers in the telecommunications industry.  He would receive no award if the return was among the bottom 20%.

If he meets the minimum return, he would be eligible for an equal number of shares for meeting targets for the fiber-optic project, expansion in its wireless unit, integrating its merger early this year with long-distance provider MCI Inc. and achieving certain legislative objectives.

Verizon declined to make executives available for comment, although a spokesman noted that in past years Mr. Seidenberg's compensation has never reached the maximum possible.

"Other companies don't want to make the investment in rolling out fiber all the way to their customers' homes and they are applauded by Wall Street and they reward their executives more," said spokesman Eric Rabe.  "If Mr. Seidenberg's compensation were based solely on the stock performance, he would have a disincentive to make the investment that we believe is necessary" for the fiber project.  "This is not a provision to make up for poor stock performance, it's a provision to make sure we do the right thing for the long-term health of the company."

Among those who see value in Verizon's move is Daniel J. Ryterband, president of Frederic W. Cook & Co., a New York compensation firm.  "Putting aside the magnitude of the award and total compensation opportunity, I see this change as an improvement in the overall program since it ensures that no payment will occur if performance is very bad," he said.

Mr. Seidenberg was paid $2.1 million in salary last year, plus a bonus of $4.1 million and $1.8 million in other compensation, for a total of $8 million, not including the long-term incentive grant.  In 2004, he was paid $13 million, which included a long-term award of $6.3 million.  His compensation sparked criticism earlier this year from the Corporate Library, an independent governance watchdog in Portland, Maine, which said while Verizon had made "some attempt" to limit nonperformance-related pay, the long-term incentive grants were paying for "below-median" performance.

In 2005, Verizon's net income was down 6% from the year before at $7.4 billion, while revenue rose 5% to $75.1 billion.

"It's good that there are companies out there willing to tie compensation to the taking of risks, but the risks have to be the right ones, and the pay has to be 'at risk' enough to make sure that it's not just guaranteed compensation," says Paul Hodgson, a compensation analyst at the Corporate Library.  "It's what CEOs are paid to do -- to make long-term bets and damn the stock price."

He adds that, "I haven't come across any other companies who have moved from specific and easily measurable financial metrics to a set of more subjective, strategic achievements for the same planned award."

Verizon announced that executives closest to the new project also will have their short-term compensation tied directly to the rollout, including the president of its fixed-line division, Virginia P. Ruesterholz, and that division's chief operating officer, Bob Mudge, as well as a senior vice president for information technology, Shadman Zafar.  Albert Lin, a San Francisco telecom analyst with American Technology Research, a Greenwich, Conn., independent-research firm, says he thinks the Verizon incentives are producing a smoother rollout of the fiber-optic project.  He contrasts Verizon's approach with rival AT&T Inc., which he says doesn't have a similar compensation scheme.

AT&T declined to comment on its reward structure but said CEO Edward Whitacre was paid a total $17 million last year.  It is spending $14.6 billion to roll out an Internet-and-television network, which costs less than Verizon's in part because the cable stops short of reaching its customers' premises.  It has missed rollout targets, which Mr. Lin says wouldn't have happened "if they had a large measure of compensation tied to the program."

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