Crain's New York Business - Feb. 6, 2006   CEO pay in crosshairs Lucent's Russo one of several targets as shareholders demand links to performance By Aaron Elstein In Patricia Russo's four years as chief executive, Lucent Technologies Inc.'s sales have dropped by nearly a quarter and its share price by more than 50%--twice the drop of S&P's Communications Equipment Index. Nevertheless, the company has rewarded Ms. Russo with more than $64 million in compensation, nearly $60 million of which was bonuses. Meanwhile, Ken Raschke, a 75-year-old Lucent shareholder and former manufacturing vice president, has seen his retirement benefits cut because of Lucent's difficulties and must pay an extra $1,000 a year for supplementary Medicare coverage for himself and his wife. So an angry Mr. Raschke helped draft a shareholder resolution telling the Lucent board to award supersized bonuses only for outstanding performance. "There's nothing revolutionary about what we're asking for," says Mr. Raschke in advance of a vote on his proposal next week at Lucent's annual stockholder meeting. "We just think that pay for senior management is completely disconnected from returns to shareholders." Like Mr. Raschke, shareholders are urging at least two dozen leading companies--including such Manhattan-based firms as Citigroup Inc., Colgate-Palmolive Co., Avon Products Inc. and ITT Industries Inc.--to limit executive bonuses if they fail to outperform the competition by a specific measure chosen by the board of directors. Investors will be asked to approve these proposals at annual stockholder meetings later this spring. "When a board compensates executives lavishly and the company isn't performing better than its rivals, it raises the question: What exactly is the board paying for?" says Ed Durkin, director of corporate research at the United Brotherhood of Carpenters and Joiners of America. His union, along with Manhattan's Amalgamated Bank, is behind most of the pay-for-performance proposals. The proposals come as excessive executive pay, which has long angered the general public, draws the attention of regulators. The Securities and Exchange Commission is considering ways to force companies to more clearly spell out just how much they pay top employees. A handful of companies, such as PepsiCo Inc., have clarified how they reward their top executives when confronted with pay-for-performance proposals. The vast majority, however, are fighting shareholders who would make it tougher for them to dole out seven- or eight-figure bonuses. "Most companies are choking on this idea," Mr. Durkin says. One of the most closely watched pay-for-performance votes will take place at Citigroup Inc. The board has awarded Chief Executive Charles Prince $37 million worth of shares as bonuses over the past three years, in addition to salary, cash bonuses and stock options. During that time, Citi's stock has underperformed the Dow Jones U.S. Financials Index. Amalgamated Bank, a Citi shareholder, hopes investors will approve its proposal asking the board to link equity-based compensation to "demonstrable performance criteria" and adopt "challenging performance targets." A Citi spokeswoman declined to comment. In the past, most institutional shareholders haven't been willing to support pay-for-performance efforts. "Everyone is disgruntled with executive pay, but shareholders rarely will vote for something so specific as tying compensation to particular benchmarks or amounts," says Carol Bowie, director of governance research at the Investor Responsibility Research Center. "They are wary as a group of getting involved in managing the company so closely." The latest versions, however, give boards leeway to choose their performance benchmarks and could generate significant support, she adds. Mr. Raschke's pay-for-performance proposal won a majority of shareholder votes when first presented at Lucent's annual meeting last year. Lucent, which opposed the nonbinding measure, declined to adopt it and opposes it again. "Our position is that our current long-term incentive plan aligns the interests of employees with shareholders," a Lucent spokeswoman says. Lucent created a new compensation plan that awards senior executives bonuses only in stock, not cash. Mr. Raschke is undeterred. He heads a 10,000-member organization of former Lucent employees. Two leading proxy advisory firms, Glass Lewis and Institutional Shareholder Services, have endorsed his proposal. He hopes a second and larger vote in favor of his plan will increase the pressure on the company. "Hopefully, the morality of what we're saying will get to them," Mr. Raschke says.   return to LRO HOME PAGE