AT&T Wireless: A Bad Call by the Board
Not quite a year ago, with business slower than planned, AT&T Wireless Services made a change. The compensation committee of its board voted to lower the hurdles, for growth in revenue and such, that employees had to clear before qualifying for 2002 bonuses. Had the board not acted, bonuses for last year would have been nil or next to it. Instead, the company's Apr. 14 proxy statement shows, AT&T Wireless employees got nice bonuses, starting with the $903,038 awarded to CEO John Zeglis.
That didn't please everyone. AT&T Wireless "couldn't meet the targets that would allow payout of huge, inflated, obscene bonuses to management," a Yahoo! Message Board poster named "swisteroo" wrote on Apr. 15. "No problem. Just lower the targets and pay out buckets of ill-gotten, undeserved money to underperforming executives.... Makes me want to puke." Overstated, maybe, but you have to wonder: What could the AT&T Wireless board have been thinking?
To find out, I spoke with Ralph Larsen, chairman of its compensation panel. "This was all my doing," he said right off. Larsen, who retired last year after 13 years as CEO of Johnson & Johnson, told me that back in January, 2002, Zeglis insisted on aggressive goals, the better to push his troops. Yet by March, the company had to warn Wall Street that growth would be slower than forecast. By June, it was clear that management, plus nearly 15,000 other employees also covered by the bonus plan, had not met first-half goals.
So Larsen moved to reset the targets for second-half performance. Others on the comp panel, Equitant CEO A. Barry Rand and Carolyn Ticknor, a retired Hewlett-Packard exec, agreed. "This was in the absolute best interests of the shareholders," Larsen told me. He noted that many measures -- revenue, cash flow, subscribers, and customer satisfaction -- showed gains, that AT&T Wireless kept its share of the cellular market amid a slowdown, and that Zeglis' 2002 compensation of $2.7 million plus options on 1.5 million shares is modest next to that of his peers. "As a general principle, changing a metric in the middle of the year is not a good thing," Larsen said. But sometimes common sense demands breaking rules. "Every once in a while you have to put your principles aside and do what's right." Had the company blown past bonus targets, setting up execs for windfalls, Larsen said, "we would have exercised negative discretion" to limit payouts.
Even if you doubt that last statement, Larsen's case is a reasonable one. And after his long run of solid successes at J&J, he has unusually high credibility. Just the same, there's something awry here. First, however much a board wants to encourage an aggressive CEO, it's hard not to fault Zeglis for goals so unrealistic that barely two months later, investors had to be warned of slower growth. The penalty might have been no annual bonuses, if not for troops, then for the nearsighted brass.
Worse is how myopic the board showed itself. Recall the state of telecom last June when the board lowered the targets: WorldCom was heading for bankruptcy amid scandal over accounting and exec pay; Qwest Communications was dumping assets to stay afloat as shareholders griped about lavish executive pay; and Jack Grubman, telecom analyst at Salomon Smith Barney, a lead underwriter of AT&T Wireless' initial public offering, was set to testify in Congress on the meltdown in telecom stocks.
By comparison, AT&T Wireless may seem angelic. Revenue in 2002 grew 15%. Operating cash flow rose 9%. Yet investors saw their shares fall 61%. Larsen told me he's surprised by reaction to the bonuses. He would pay them again given the same circumstances. "This is a judgment call," he said. "Quite frankly, that's what I get paid for." Precisely.