In a league of their own: the salary scene has changed over the past 18 months. The downturn has forced companies to rethink how employees are paid, but some chief executives continue to be highly rewarded - Industry Overview

CommunicationsWeek International, May 20, 2002 by Ingrid Lunden, Ian Kemp

When telecommunications was a cash cow for investors, telecoms employees at almost every level in the industry enjoyed a share of the financial spoils.

With stock market valuations soaring, it wasn't just the top dogs who were in line to feel the benefits. "[In the boom period], in the telco world it very much had to do with throwing share options at you, even if you worked in engineering," says Di Whitlam, a London-based consultant for the telecoms and technology practice of international recruitment agency Robert Walters.

How things have changed. The litany of complaints against telecoms companies' payment packages to senior executives has been building in recent months, and on the face of it. it's not hard to see why. Over the past year some executives have been highly rewarded while their companies have foundered and employee numbers have been slashed: Lucent Technologies, WorldCom, Marconi, Telewest, NTL, Flag Telecom and Global Crossing are among the big names under the microscope in recent months for making substantial payouts (see box, right).

But clearly, huge bonuses and share options--many of which have plummeted along with company valuations--are just a part of the bigger salary picture to emerge from the crash.

Some experts point to more realism in remuneration, while others say it has created opportunities for the survivors to snap up much-needed talent at sensible prices. Some positions, particularly in areas of mobile communications, remain in demand and command ever higher rewards; salaries for many other non-executive positions have remained relatively constant.

Big money at the top

Senior executives, of course, are always going to be paid highly for driving their companies, partly because of simple supply-demand economics, and sometimes when they have been brought in expressly to rebalance assets, including staff. "There are a finite amount of people who are really capable of running major organizations," says Peter Craig-Cooper, an account director at executive recruitment company CalibreOne, of London. "If you are going to have a real competitive advantage, you have to have that."

That, in part, is why companies in deep trouble--in some cases restructuring through Chapter 11 bankruptcy protection--are paying big retention bonuses to keep executives. As many experts point out, if one telecoms company won't reward its chiefs with big pay packets, another will.

"The bonuses are still there, and they always will be there. Executives are always going to continue to be highly incentivized," says Robin Roberts, who heads up the telecoms and technology practice for executive headhunters Egon Zehnder, of London. "Without exception, long-term incentive plans [LTIPs]...add up to more money than the cash salary side." Qwest Communications International, for example, paid chairman Joseph Nacchio a substantial $27 million in 2001, despite the company s stock price declining by 64% (see box, right). About $24.4 million of that amount came from LTIPs.

But increasingly, shareholders, employees and markets are starting to question whether there should be a greater degree of accountability, particularly when large payouts don't appear commensurate with the fortunes of the company.

"The idea that shareholders should see shareholder value go up is correct, but the [ideal that executive compensation is linked to that criteria is flawed, because they'll do anything to keep their money up." says Alan Tumolillo, chief executive of Probe Research Inc., of Cedar Knolls, New Jersey. He says that metrics other than stock value should be used to measure longer-term shareholder returns, and that boards should be held more accountable for the poor performance of top executives.

"The best thing that could happen in the industry is to have a couple of shareholder suits that pin the boards [of failing companies] up against the wall," he continues. "Where were the boards? What were they doing at the time? Why were they approving these schemes?"

In part, many of the payouts now being seen were written into contracts when the industry was still rising. Before the fall, many employees--not just executives--were being handsomely rewarded to attract skills into the industry.

"Four years ago, there was a massive shakeup of the market. A huge number of talented people were recruited, and there was a complete rethink of salary packages," says Sylvia Mondello, consultant at Watson Wyatt. an employment and management consultancy that advises telecoms companies on remuneration practices worldwide. "Typical telecoms companies were not ready for this surge in the market, and the reward strategy was very much based on paying to get talent in." Mondello was previously a compensation and benefits manager at Finnish mobile operator Nokia.

At the peak, high salaries were also partly tied to the fact that there were so many new technologies coming onto the market. "Twenty-four months ago, when the industry was ballooning, expanding into completely new areas such as 3G and bluetooth, I don't think [many] people really understood what it was evaluating. Analysts were happy to see anyone with a good track record get rewarded for leading these companies," says Craig-Cooper at CalibreOne. Other experts say that beyond the executive level, anyone who had experience in these areas was in huge demand.