Wall Street Journal February 15, 2006; Page C1
In recent years, Lucent Technologies Inc.'s retirees have seen many of their benefits cut. Now they are fighting back -- proposing to rein in the compensation of the executives doing the cutting.
Lucent's shareholders today are voting on a proposal to restrict the pay of the top brass. The proxy proposal, which was put forward by retirees, would make 75% of executive stock grants dependent on the telecom-equipment maker's performance. It is partly a reaction to last year's sharp increase in the bonus of Lucent's chief executive, Patricia F. Russo.
It isn't just happening at Lucent. Retirees from a range of companies including Verizon Communications Inc., General Electric Co., International Business Machines Corp., Prudential Financial Inc. and Qwest Communications International Inc. are presenting proposals to restrict executive compensation. The retirees are motivated partly by concerns that the value of their nest eggs can crack when the value of their companies' stocks drops.
"In these years of corporate tumult, which has seen many great companies turn into shells of their former selves, one thing has remained constant -- ever-rising levels of executive and board compensation," said Joanne Raschke, who filed the Lucent proposal. She holds 6,200 shares of stock in Lucent, a legacy of her husband Ken's 36 years with its predecessor companies.
This is actually the second attempt for the Lucent proposal. Last year a similar proposal by retirees received very strong support from shareholders, according to Patrick McGurn of Institutional Shareholder Services, a firm that advises shareholders on corporate proxy votes and is recommending they support this proposal.
Last year's proposal actually received a slim 50.2% majority of votes cast. However, abstentions are routinely counted as "no" votes, which caused the proposal to fail.
Mr. McGurn expects this year's proposal to receive vigorous shareholder support. "The board didn't do anything substantively last year to respond to that vote," Mr. McGurn said. "That will drive strong support for it again this year."
At Lucent, retirees are frustrated by the elimination of a benefit that paid up to a one-year salary to the spouse upon the death of a retired employee, and by lower company contributions for medical-insurance premiums. They have been vigorous critics of CEO Russo's pay: In 2005, Ms. Russo was awarded a $3.6 million bonus on top of a base salary of $1.2 million, and was granted an additional $8.7 million in restricted stock and options. In 2004, she was awarded a $1.95 million bonus on top of her $1.2 million salary, $4.6 million in restricted stock plus $4.8 million in options. Lucent notes that all of the options remain below the exercise price.
Lucent says that the actions were necessary to return to profitability, and that Ms. Russo's compensation was in part a reward for moving the company into the black in 2004 and 2005. "We believe that our long-term compensation plans are aligned with the interests of shareholders," said Mary Ward, a spokeswoman, adding that half of senior executives' compensation comes from Lucent shares whose value is based on its operating performance.
Lucent's stock is widely held, and retirees represent only a fraction of overall shareholders. Yesterday the stock closed at $2.83, up six cents, or 2.2%, in 4 p.m. composite trading on the New York Stock Exchange.
U.S. companies have been retreating from their decades-long practice of offering a well-funded retirement for long-time employees. Scores of companies have cut health benefits for retirees, and in recent months, General Motors Corp., IBM and Verizon have joined a wave of companies freezing the level of pension benefits for certain employees.
But even as retiree benefits are being cut, compensation for executives has risen: The median compensation for a chief executive officer in a Standard & Poor's 500 company was $6 million in 2004, up more than 13% from 2003, according to the Corporate Library.
While unions were among the first groups to take to shareholder activism, the retiree groups are largely run by former managers and technical staff, smarting at their diminished voice and the company's often adversarial stance to retiree questions. "We built the company and have been cooperative with them, and we want the dialogue and some answers," said Dick Ciocca, president of the Philadelphia-based National Association of Prudential Retirees. "Executive compensation was where we could get their attention."
The group has submitted a proposal to require shareholder approval of "golden parachutes," or severance payments, for departing executives. These kinds of proposals have had the most success, says Carol Bowie, director of governance research for Institutional Shareholder Services, based in Washington. Companies such as Lucent and Verizon voluntarily incorporated this demand after strong support for proposals that they later negotiated off the ballot.
Other retiree groups are seeking better disclosure of executive pay.
Janet Krueger, a 52-year-old software consultant who quit IBM after 23 years, will resubmit her proposal from last year requiring IBM to fully disclose what executives are paid, including the value of their pensions, retiree benefits and deferred compensation. Although IBM hasn't yet published its proxy proposals for this year, last year it opposed the resolution, saying the company complied with Securities and Exchange Commission requirements.
---- Dionne Searcey contributed to this article.
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