The Talent Drain At At&T

Can Mike Armstrong stanch the flow of key execs?

Daniel H. Schulman thought big when he joined AT&T as a junior marketer in 1981. If he patiently stuck it out and climbed to the top of the corporate ladder, he could look forward to a hefty salary, a chauffeur-driven limousine, and a coveted membership at the Baltustrol Golf Club near the phone company's headquarters in Basking Ridge, N.J. But last year, shortly after Schulman finally reached the pinnacle as head of the company's $24 billion Consumer Services Div., he abruptly quit to become president of Internet startup Inc.

Why would Schulman throw away all he had worked for at AT&T for nearly 20 years? For starters, gave him a $100 million multiyear compensation package. More important: AT&T could not touch when it came to producing an adrenaline rush. "You think about all the times in history you might have wished for a frontier to explore," says Schulman, 42. "The Net is one right here and now for our generation."

Unfortunately for AT&T, Schulman is not the only defector among its key executives. Roughly a dozen execs have left the company since Chairman C. Michael Armstrong arrived in late 1997--and they're still leaving in a steady stream long after his transition period ended. Some, like Schulman, were bitten by the startup bug. Others were impatient with AT&T's slow progress in transforming itself from a creaky old phone company into a speedy Internet player. And, for others, frictions with Armstrong have been as big a factor in their departures as the lure of exciting opportunities elsewhere.

Armstrong is admired by many for his strongman style, but, to some executives who have worked for him, he's overbearing and inflexible. He manages them too closely, they say, and prevents them from spending money they need to to expand their businesses. They complain that Armstrong insists on personally approving all decisions about pricing and hiring of key managers. And it rankles them that he keeps them in staff meetings every Monday for up to nine hours. "Unfortunately...he is chairman, CEO, president, and COO all rolled up into one," says one former exec.

The list of people who have abandoned Armstrong's ship reads like a Who's Who of the tech industry. There's Robert Annunziata, who left one year ago as head of AT&T's Business Services Div. to become CEO of telecom up-and-comer Global Crossing Ltd. He was joined there late last year by Leo Hindery, who ran AT&T's cable TV operations. Jeffrey Weitzen, another Business Services boss, left two years ago to become chief operating officer of PC maker Gateway Inc. Now he's CEO. The most recent major defector, H. Eugene Lockhart, who ran AT&T's consumer unit, quit in February to be CEO of a still hush-hush dot-com. "I can't think of a company that loses more executive talent than AT&T," says Brian Adamik, COO at market researcher Yankee Group.

This is happening just as AT&T is entering a crucial stage in its 123-year history. Armstrong aims to beef up AT&T's offerings from regular phone connections to state-of-the art services such as high-speed Internet access, global networks for businesses, and wireless voice and data services. He has spent $110 billion on cable TV acquisitions. Now he must integrate those operations even as he fends off the incursion of the regional Bell companies into the long-distance market.

While Armstrong admits that his executives are prime targets for headhunters, he denies it's a serious problem. He claims he's not an overbearing manager and that there's room in his organization for other strong personalities. He demands that executives meet his expectations, but he denies that he makes unfair demands or overrules their every decision. "I develop people to be strong. I try not to bury people in the company. I want as many strong executives as I can get," he says.

But the company's strong managers are much sought after, he says. "There is terrible demand on the AT&T talent pool," Armstrong says. "The key question is whether the core executive strength is still there, and I feel very confident today that it is"--a claim that at least some Wall Street analysts agree with. Armstrong says some of the high-profile departures were involuntary--although he won't name names.

THROUGH THE CRACKS. In spite of Armstrong's assurances that nothing is amiss, he's moving aggressively to hold on to top people. A key initiative: boosting stock options. The board's compensation committee has approved a new option plan that will be announced later this month, Business Week has learned. Under the old plan, managers who received options had to wait five years to exercise them. Now, people can exercise 25% of the options one year after they receive them and an additional 25% every year thereafter.

Accelerating stock payouts won't fix everything, though. Armstrong is under intense pressure to improve the company's performance. He has already done a lot right. The company has doubled its growth rate in each of the last three years--rising from 1.5% in 1997 to 6.2% last year. Still, many investors seem to have lost faith in him. The company's stock price is hovering at around $44 a share, down 28% from a high of $63 on May 6, 1999.

Armstrong is struggling mightily to produce results that will earn the confidence of investors. He was hailed as a potential savior when he arrived at AT&T in 1997 to replace former chairman and CEO Robert E. Allen, who fell behind on the Internet and let growth lag. He quickly decided to provide high-speed cable modem service to about one-third of U.S. households so AT&T could have direct contact with customers rather than reaching them through local telephone lines.

But Armstrong won't be able to meet his goals unless he has a strong team of managers capable of executing flawlessly. Already, the constant turnover seems to be hurting performance. Some important initiatives are falling through the cracks. Before Annunziata left, he predicted the company's Business Services Div. wouldn't be able to hit its financial targets if it didn't have 1,000 additional salespeople. He had hired only a few hundred of them before he went to Global. But two people have run the unit since Annunziata left, and the jobs still aren't filled.

Most of the conflicts between Armstrong and his lieutenants were disagreements over how to execute strategies to meet goals--not the strategies themselves. Sometimes, it was about power. Annunziata wanted AT&T's $4 billion business-consulting unit integrated into the $29 billion Business Services Div. that he was running. He urged Armstrong to dismantle some of the company's fiefdoms, which he felt were counterproductive, according to executives familiar with the situation. Armstrong declined--merging them only after Annunziata left, the executives say.

Other conflicts were over money. Lockhart and Armstrong agreed on the need to cut costs in the giant Consumer Services Div., but they disagreed on how fast to do it. Lockhart wanted to stretch the cost cuts out over two or three years, according to former executives. That would leave room for investments in revenue-building programs such as airline frequent-flier promotions. But Armstrong insisted on making cuts in just one year--and a frustrated Lockhart headed for the exit, say executives familiar with the matter. It's difficult to get former executives to speak about AT&T because many of them have signed agreements preventing them from publicly criticizing the company.

Armstrong does have his supporters among the ranks of former executives. They describe him as a demanding but fair boss who brought out the best in the people around him. "Once he was convinced you could produce results, he would support you and invest in your ideas with little interference," says Byron Smith, a former vice-president in AT&T's Consumer Services Div. who now heads marketing at Web portal Excite@Home, in which AT&T has a stake.

GREEN CARROTS. And Armstrong is making efforts to attract and retain the best people at all levels in the organization. The company is making stock options available to anyone classified as a manager, which includes about half of its 150,000 employees. Also, Armstrong is creating a separate tracking stock for AT&T's wireless business, which is expected to perform well. "This creates a currency they can use to retain some of the most appealing people, especially in the growth areas," says Lehman Brothers Inc. telecom analyst Blake Bath.

Armstrong has had some luck keeping a handful of managers. He saw that rising star Richard R. Roscitt, who had been running the company's consulting unit, was eager for a larger business, so he put him in charge of the $29 billion Business Services Div. He also gave AT&T President John D. Zeglis more operational responsibilities, making him CEO of AT&T Wireless Group. Zeglis had considered leaving AT&T to run a utility company and was also in the running for the top job at Hewlett-Packard Co.

But keeping managers happy is a tricky business. By satisfying Zeglis, Armstrong could end up losing Daniel R. Hesse, the ambitious head of the mobile wireless unit, who now reports to Zeglis. AT&T has kept Hesse on board so far by throwing a lot of stock options at him, according to executives familiar with the situation.

HAPPIER TROOPS. In the ranks, AT&T's morale seems to be improving. In July, 1997, six months before Armstrong arrived, an internal survey showed that only 10% of employees had confidence in the management. A new survey shows confidence has risen to 54%. AT&T now has a bold strategy. And Armstrong has encouraged a fighting spirit. That's enough to keep many of its employees hanging on to see how the battle turns out. "I have received incredible offers...from startups and from clients. I could leave in a heartbeat if I wanted to," says Nancy Sirles, a top sales representative who heads AT&T's General Electric Co. account. "But there are great things going on here, and I choose to stay."

Now, Armstrong has to convince his top executives that the thrill isn't gone at AT&T--and it's worth their while to stay, too.

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