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Bonuses Once Meant to retain Talent Now Risk Outrage

By: Barnaby J. Feder
New York Times, June 29, 2002

As it moves to lay off thousands of employees to cut costs, WorldCom is also facing the conflicting problem of avoiding an exodus of experienced senior executives needed to help it survive.

The management challenge is heightened by the looming expiration of a retention program that paid 558 top executives roughly $237 million in bonuses two years ago — an average of nearly $425,000 — to keep them from leaving the company during a period that will end on July 30. Some of the executives received bonuses of well over $1 million that are supposed to be returned if they leave before then. But once the deadline has passed, executive recruiters say that all bets are off.

"WorldCom had a fairly loyal group of senior executives, but they really got blindsided and many are angry," said Paul Unger, managing director of the telecommunications and technology practice in the McLean, Va., office of the recruiting firm Christian & Timbers.

If John W. Sidgmore, WorldCom's recently named chief executive, institutes a new retention program to keep top managers, he is likely to face a public outcry for paying bonuses to relatively wealthy executives at a time thousands of workers are being laid off. Enron was condemned by employees and politicians for paying as much as $100 million in retention bonuses to managers and traders shortly before filing for bankruptcy even as its laid-off workers were receiving two weeks' pay.

The criticism is expected to be especially sharp when these big payouts are cited in contrast to severance payments to the 17,000 workers whom WorldCom is letting go.

The severance payment terms have not yet been announced, but the company — which is trying to induce lenders to grant it new credit lines — may have little freedom to be generous.

Because of provisions in the retention program, WorldCom also faces a decision about whether to seek repayments from those fired or forced to retire before the deadline. Both Bernard J. Ebbers, who resigned as chief executive at the end of April, and Scott D. Sullivan, the chief financial officer who was fired on Tuesday, received $10 million retention bonuses in 2000 that the company has a right to reclaim, according to Mr. Ebbers's own testimony in a lawsuit last fall.

His severance package provides him with $1.5 million annually for life, use of a company plane for 30 hours a year and medical and life insurance, according to a WorldCom filing with the Securities and Exchange Commission last month. It obligates him to be available as a consultant for five years but makes no mention of the $10 million bonus. Mr. Ebbers could not be reached for comment yesterday.

WorldCom has not disclosed any financial arrangements with Mr. Sullivan, who also could not be reached. His lawyer, Andrew J. Graham, declined to comment.

Bradford Burns, a spokesman for WorldCom, said the company had no comment on future retention programs or any claim it might have for repayment of the bonuses of executives who had left.

Keeping other top executives will undoubtedly be a great challenge. Recruiters say senior financial executives at WorldCom may suffer from the taint of the accounting scandal disclosed on Tuesday. That disclosure came on top of a much broader inquiry into WorldCom's accounting practices that the S.E.C. opened earlier this year.

But operating, marketing and technology executives may wind up with lucrative offers, and many now seem ready to leave.

"We called one guy Friday and got put off with a standing-tall, sticking-it-out speech," an executive recruiter said. "After the announcement, he called back on his knees."

The biggest restraint on the restless executives are continued layoffs and lack of jobs in the devastated telecommunications industry. But recruiters say WorldCom executives have recently become more open to offers in other information technology industries and at consulting or marketing companies that serve governments or large businesses.

In 2000, when the original retention package was put together, WorldCom had to figure out how big a package of stock and cash bonuses would be required to keep executives from jumping to dot-coms and other start-up ventures that were then thriving, said Clare H. Draper IV, an employment law specialist at the law firm of Alston & Bird in Atlanta.

WorldCom, now flirting with bankruptcy, faces the much more complex job today of figuring out how much to offer, how to come up with the money and how to persuade managers that they can count on receiving any portion that is deferred. In most states, employees are unsecured creditors whose claims are among the last paid in bankruptcy. That is likely to discourage most from accepting a plan that does not provide a substantial bonus upfront or set aside cash in a trust fund that could be insulated from bankruptcy claims.

"Sidgmore will have to give out retention bonuses that in some cases could be in the $2 million to $3 million range, and he doesn't have the cash to do it," said Alan Neely, global leader of Korn/Ferry International's communications and convergence recruiting practice in Atlanta. "That's what's so harrowing about his position."

Whatever Mr. Sidgmore does, he is likely to opt for a plan that is more formal than the one his predecessor, Mr. Ebbers, instituted when WorldCom's top management was expecting to merge with Sprint and continue growing. The Ebbers plan consisted of bonus payments plus stock options that are now worthless.

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