Caller Rewards Program

Now we know why US West execs thinks life's better here.

When US West announced that it had decided to reject its first suitor, Global Crossing, and marry Qwest instead, most shareholders rejoiced at their good fortune. After all, Qwest's bid of $69 per share was considerably more generous than Global Crossing's offer. And no one had more reason to be pleased than US West's chief executive officer, Solomon Trujillo, who, according to filings with the Securities and Exchange Commission, could plump his bank account by more than $100 million as a result of the merger.

Many people will make plenty of money off the US West/Qwest deal. Lawyers, bankers and MBA money men all pick at the dough before a merger pie is fully baked--and the bigger the pastry, the heftier their portions become. But Trujillo's career-making payday comes courtesy of a special clause in the 47-year-old CEO's contract.

Increasingly common in executives' employment deals, "change of control" provisions were once referred to as "golden parachutes." No matter what name they go by, though, the deals work in essentially the same way: When a company is bought, sold or merged into another--in short, whenever ownership shifts--the top executives get big payoffs. Trujillo's deal would kick in if he quit or was fired, or even if his job description changed a little.

Bob McGowan, chairman of the Department of Management at the University of Denver's Daniels College of Business, explains that the clauses first began appearing in top executives' contracts in the economically depressed 1970s, when top executives were being lured away from good jobs to salvage troubled companies. The idea behind the golden parachutes was to offer greater compensation for a manager taking the risk of leaving a secure job for an unstable one.

During the 1980s, McGowan continues, the change-of-control clauses also began working as so-called poison pills. When one company initiated a hostile takeover of another, an executive's lucrative golden parachute clause could act as a deterrent to the predatory company, making it more expensive to acquire its target.

Today, however, the reason for granting such generous deals to executives is less clear, and justification for the gigantic rewards can be debated in either direction. Earlier this year, at US West's annual shareholder meeting in New York City, Glen McBarron, a stockholder from Washington, made a succinct case against the deals. He suggested that the extraordinary awards could influence an executive to consider his own pocketbook over the well-being of the company itself.

"In my view, a conflict of interest is created when executives are awarded special compensation that is to be paid only in the event of a future merger or acquisition," McBarron argued. "Such awards provide management with a personal financial incentive to perform their duties in a way that might be detrimental to shareholder interests."

McBarron proposed freezing the golden parachutes in US West executives' contracts at their current levels, and he recommended that any further increases be approved by a shareholder vote. His proposition (which was defeated) was opposed by US West's board of directors, which pointed out that "change-of-control agreements encourage both continuity and cooperation of management during periods of uncertainty."

The board also noted that Trujillo had given up something in exchange for any change-of-control payoff: "He would be restricted from competing with US West for a period of three years," the board explained in recommending a vote against McBarron's proposal. "By providing a minimum level of financial security in the event of potential job loss, change-of-control awards encourage management to objectively assess takeover bids and tender offers with less concern about the possible loss of personal income."

The farce, of course, lies in the phrase "minimal level of financial security." Here, according to US West's board of directors, is what Sol Trujillo needs to maintain the most basic level of subsistence while he searches for meaningful employment:

* The first provision of Trujillo's change-of-control deal is that he would get a cash payout equal to three times his salary. Conveniently, Trujillo in August 1998 enjoyed a 29 percent raise, from $716,041 to $900,000. Three times $900,000 equals $2.7 million.

* Trujillo also would get a lump-sum payment equal to three times his last annual bonus, according to his golden parachute. In 1998 the CEO earned a $650,000 bonus. Multiply that by three and you get another $1.95 million.

* Following a change of control, Trujillo would also receive three times his last annual payment under the company's long-term incentive plan. Last year Trujillo received $414,000. That adds another $1,242,000 to his minimum level of financial security. (The number could be much higher; Trujillo's 1998-2000 long-term performance incentives, under which the change-of-control figures might be calculated, are much more generous.)

* To the Internal Revenue Service, all of that cash income would be equivalent to winning the lottery--it should mean a huge tax bill for Trujillo. Except that US West also agreed to cover the government's share of Trujillo's golden-parachute payments. In other words, a $5 million payment means a $5 million payment.

* The clause provides for Trujillo to become fully vested in US West's pension plan and for three years of service to be added to his time of employment for the purposes of calculating the annual post-retirement payments. According to SEC filings, this would entitle him to yearly checks of somewhere between $592,000 and $684,300.

1
 
2
 
All
 
Next Page »
 
My Voice Nation Help
0 comments
 
Denver Concert Tickets
Loading...