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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.

Yet all of that money, impressive as it is, is chump change compared to the most lucrative provision of Trujillo's change-of-control deal. The richest section of the clause by far is the one that addresses the CEO's numerous stock options.

Stock options are given to executives with the optimistic implication that the company's stock price will climb. They work like this: An executive is awarded "options" to purchase stock at a particular price that doesn't change. As a result, when the stock price does go up, the executive can buy the stock at the option price, sell at the current, higher price and pocket the difference.

Usually, the only restriction on these transactions is that the option grants are doled out by the company over a period of years, sometimes as long as a decade. The board of directors does this to convince the executive to stay with the company for the long haul--and to prevent a CEO from taking the money and running following a sudden jump in a stock's worth.

Yet Trujillo's change-of-control agreement erases all that: According to his golden parachute, any stock options he has pending are immediately vested. In other words, he could cash in right away. And it would be a lot of cash.

There are several reasons that Trujillo holds an immense number of US West stock options. One is completely understandable: He is a lifetime employee of US West. Trujillo began working for the company 25 years ago, in 1974. Many companies reward their employees with stock options, and so, generally speaking, a long tenure would naturally mean a greater number of accumulated options.

Trujillo also holds numerous options because, increasingly, it is the preferred method of compensating top executives. This can make good sense. By paying a CEO with stock, his personal fortunes rise and fall with the company's performance--a powerful incentive for him to do a good job.

Yet the sheer quantity of stock options granted to executives can be staggering. Last year alone, for example, Trujillo earned "only" $716,000 (until, as noted earlier, he got a $184,000 raise) and a $650,000 bonus, for a modest total of just under $1.5 million. But his real pay came in stock options.

In February 1998, for instance, US West's board of directors awarded Trujillo the option to buy 313,000 shares of US West at $49.60 each. Six months later, as a reward for his role in separating US West into two companies (in June 1998, US West divided into US West and MediaOne Group, Inc.), he was granted another 750,000 stock options, priced at $51.60.

Thanks to his change-of-control deal, those 1998 options alone would permit Trujillo to retire in high style. If the merger is approved by the various state and federal regulatory agencies considering it, Qwest has promised to pay $69 per share of US West. That means Trujillo could exercise the option to purchase last year's 1,063,000 stock-option awards, at $49.60 and $51.60 respectively, for $54.22 million--and then immediately turn around and sell them for $73.35 million. That's a very quick profit of $19.12 million.

Of course, those aren't Trujillo's only stock options. According to the company's SEC filings, the US West CEO owns 1,680,780 shares of company stock. After Qwest and US West merge, those will be worth just over $97.5 million.

Nor is Trujillo the only US West executive covered under the utility company's generous change-of-control awards. Gregory Winn, the company's executive vice president for operations and technology, Allan Spies, chief financial officer, Mark Roellig, executive vice president for public policy, human resources and law, and James Smith, president of US West Dex, will all enjoy similar, though lesser, awards when the Qwest/ US West merger is completed.

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Eric Dexheimer
Contact: Eric Dexheimer