The Association of U S West Retirees



He's smiling. They're not.
Disconnect: The Qwest CEO's pay package highlights a gulf between executive and employee compensation.

By H. J. Cummings,
Minneapolis Star Tribune
Sunday, May 20, 2007

When Qwest Communications went looking for a new CEO in 2002, Richard Notebaert could play hard to get.  The beleaguered telephone company had just forced out its former CEO amid an insider trading scandal.

Notebaert, who'd been CEO at two other telecommunications firms, drove a hard bargain.  He negotiated a contract that, among other things, pays for his personal financial planning (plus some extra to cover the income tax he'll owe on that perk) and 5 million stock options.  It credited him with 30.4 years worth of service toward his pension on his first day on the job.  That gave him a $9 million head start toward retirement.

In 2006 alone, Notebaert's total compensation was about $33 million.

Last year was not so kind to Qwest retirees Mary Ann Neuman and Nancy Meister.  Neuman, a 61-year-old New Hope resident, saw her monthly health insurance premium jump 79 percent, from $124 to $222.  Meister, 57, of Plymouth, got word her former employer was cutting her company life insurance policy to about 15 percent of the payout she'd been promised.

Qwest says the reduced benefits for retirees have been made necessary by the increased costs it faces.  But the contrast between the treatment afforded the CEO and the rank and file isn't limited to Qwest.

Top executives are being paid 262 times the average worker's wage, up from a multiple of 24 about 40 years ago, according to the Economic Policy Institute's most recent analysis in 2005.  The gap widened significantly in the 1990s, in part because of the generous use of stock options in executive pay packages.

Chuck Denny, retired CEO of ADC Telecommunications Inc. in Eden Prairie, sees a broad challenge stemming from the growing pay gap, a violation of the social contract of democratic free market capitalism.

"It has always been assumed that we'll allow some people to make vast amounts of money, as long as everyone else sees their standard of living increase," Denny said.  "This compact is being broken."

Institutional Shareholder Services, a Wall Street research firm, calculated that for every $100 in 2006 net income at the 38,000-employee Qwest, $4.16 went to its CEO.

Meanwhile, Qwest call center workers have complained in federal court that the company has been forcing them to work overtime without pay.

Nikie Graham, 22, of Roseville, is part of the Minnesota lawsuit that challenges conditions in Qwest's St. Paul call center, where Graham worked in 2004 and 2005.  The regular demands of the job -- like starting 10 to 20 computer systems and programs to be ready for calls when their shifts began -- tacks about half an hour onto everyone's work day, Graham estimates.  "I worked a lot of time that I didn't get paid for, and it wasn't right," she said.

Qwest, which is based in Denver and has about 4,200 employees in Minnesota, denies the allegations.  But Graham's attorneys have won the first in a two-step process to take the case national, after hearing from Qwest call center workers in 11 other states.

Reward without risk

Extraordinary CEO pay these days turns another core capitalist principle on its head -- that great rewards go to those who take great risks -- said Stephen Young, executive director of the Caux Round Table in St. Paul, an international network of business leaders that looks at business standards.

Working Americans are bearing the risks of layoffs, outsourcing and lost retirement benefits, Young said.  At the same time, top CEOs increase their multiples of pay and lock in their own retirement benefits.

For example, Notebaert has both regular employee and special executive pensions at Qwest, with a current combined value of $10 million.  He has retiree health coverage from another employer, but Qwest promises that if that goes away for any reason, it will cover him.  Qwest also will set him up with a private office for the rest of his life, worth $3.5 million, plus $2.2 million to cover the income taxes he'll owe on that.

"The Notebaert retirement -- that's all completely risk-free," Young said.  "And health coverage?  He's going to be covered one way or another.  [Some] people are going to have a lot of fun trying to live on Social Security, while this guy is not."

Qwest spokeswoman Diane Reberger said changes to workers' and retirees' benefits were a prudent response to changes in the costs of providing such compensation.

"It was a difficult decision, and not one taken lightly," Reberger said.

She added that Notebaert has earned his pay.  Qwest stock now trades at about $10 a share, up from $5.16 on the last day of May 2002.  Total return to Qwest shareholders for the period is about 88 percent, compared with about 54 percent for the Standard & Poor's 500 index.

"Look at his compensation in terms of how the company has performed," she said.  "We just reported our fifth consecutive quarter of profitability.  Cash flow and margins have improved, and customer service scores are at an all-time high.  Across the board, the company has made dramatic improvements."

However, the company also credited decreases in operating and benefit expenses in announcing its first-quarter gains this year.

The perks list

In its proxy statement, the company reported that Notebaert earned almost $33 million in 2006, including $1.1 million in salary, $4.1 million in bonus, $760,000 in perks, $18.4 million in stock options he exercised, and $8.4 million in stock grants that vested last year.

The filing also details for the first time Notebaert's package of perquisites, a new reporting requirement for all public companies in 2006.  His perks include: $331,873 for use of the corporate jet, including travel by his wife;  $55,921 for a personal assistant and office, and $17,113 for miscellaneous items such as club memberships and personal ground transportation.  In addition, he's paid $75,000 for any other perks of his choice.

Notebaert's contract and the company's financial performance earned Qwest a place on the list of 12 worst companies in a "Pay For Failure" report by the Corporate Library, a Maine-based corporate governance research organization released earlier this month.

Qwest's Reberger called the report unfair because it covers 2001-2006 and Notebaert didn't join Qwest until 2002.  "It's just not an apples-to-apples comparison," she said.

The report's author, Paul Hodgson, stands by the analysis.

"My contention is he has been compensated extremely handsomely for what shareholders would see as an OK record in the last two to three years," Hodgson said.

H.J. Cummins 612-673-4671