Though Nortel's (NT:NYSE - commentary - research) true financial health remains shrouded, one thing seems clear: Last year's executive bonuses were too good to be true.
On Wednesday, Nortel served up some more details on its April accounting shocker. Saying internal audits would continue for at least another quarter, Nortel reiterated that cleaning up its books would slash 2003 earnings by some $300 million and eliminate last year's surprising first-half profit.
Most important, Nortel said for the first time that 2003's phantom profits came from its core business of selling telecom gear -- not from selling assets or other one-time events. That disclosure is crucial, because it draws a link between the company's oft-questioned executive pay incentive plan and the recent accounting missteps. Analysts and investors say the link could shed some light on this spring's firing of top execs including former CEO Frank Dunn.
The company paid out more than $50 million in bonuses to select officers last year after posting a surprising first-half profit. Dunn alone received $2.15 million, according to a report last month in The Globe and Mail of Toronto.
Nortel's filings specify that the bonuses be paid only if the company reaches a profit on "pro forma earnings from continuing operations." But even at the time the company posted the stunning swing, the numbers failed to add up.
Indeed, people were questioning those profits from the day they were reported. The link between the bonuses and Nortel's slippery profit number was flagged a year ago in TheStreet.com. At the time, several observers suggested that the company had stuffed the continuing operations profit line with noncore gains in order to make executives and employees eligible for millions of dollars in "return to profit" bonuses.
In April, Nortel said its restatement was focused "largely" on profits from continuing operations. But on Wednesday, Nortel said all its profits from continuing operations in the first half of 2003 would be moved back to prior years. As a result, it seems clear that the company failed to meet its bonus targets, going by legitimately booked profits.
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