Check this out, Ted ... if you can tear yourself away from the make-up mirror <g> long enough to at least scan the head and lead graph ...
May we expect to see any 'in-depth coverage' or 'analysis' tomorrow on this information from the WSJ?
'Pay to Stay' Bonuses Catch On At Troubled Telecom Companies
October 31, 2001
By ANN DAVIS
Staff Reporter of THE WALL STREET JOURNAL
NEW YORK -- In this year's unforgiving economy, managers in most
industries are expecting sharply lower bonuses. But there is at least one sector
where pay is rising: busted telecommunications and high-tech companies.
This past summer, Steve Stringer was pulling in $1.14 million in salary and
bonuses trying to keep Rhythms Netconnections Inc. from spiraling into
bankruptcy court. He lost that battle, but won something else: a raise. Though
his broadband-services company is now selling off its assets at fire-sale prices
-- in late September it agreed to sell most of its network to WorldCom Inc. --
the chief executive has more than doubled this year's expected take-home pay
to $2.5 million. He also stands to collect as much as $500,000 in addition to his
salary as a "restructuring success bonus," depending on how much bondholders
recoup.
Harry Hobbs's salary was $800,000 this spring as the newly promoted chief
executive of PSINet, a networking company choking on $2.9 billion in debt. In
May, it went into default and filed in bankruptcy court. Mr. Hobbs was hardly
stiffed. He negotiated a $525,000 retention bonus with the company's board
and creditors to oversee the company in Chapter 11 of the U.S. Bankruptcy
Code and a "deal bonus" of as much as $360,000 if bondholders recover less
than 1/20th of what they are owed.
The pay packages of Messrs. Stringer and Hobbs represent an increasingly
popular trend in executive compensation: Chapter 11 hardship pay. Executives
at companies such as Rhythms and PSINet, as well as several other former
highfliers now in bankruptcy court, including Winstar Communications Inc. and
360networks, have prevailed upon boards, creditors and bankruptcy-court
judges for permission to be paid generously in Chapter 11. Sometimes, they are
being paid double or triple what they made when their companies seemed
headed for greatness. Messrs. Stringer and Hobbs declined comment through
corporate representatives.
Companies in bankruptcy court argue these "pay to stay" bonuses are
imperative to keep mission-critical executives from bolting during the thankless
phase of rebuilding or dismantling an ailing enterprise.
Even bondholders who are facing big losses sometimes view the bonuses as a
necessary evil. "The sophisticated players often build a few million bucks into
their plan for this," says Henry Miller, head of restructuring and vice chairman of
Dresdner Kleinwort Wasserstein Inc. He explains that in telecom and high-tech,
networks are worth less every day that equipment sits idle or customers defect,
so a long search for replacement executives is counterproductive.
The wide use of pay-to-stay bonuses is a shift from the last economic
slowdown in the early 1990s, says David R. Williams, a restructuring and
executive pay expert with PricewaterhouseCoopers. Although some companies
once in Chapter 11, such as Federated Department Stores Inc., used such
bonuses years ago, creditors warmed to the idea on a larger scale after
watching some retail and electronics-chains suffer through major executive
flight.
Today's wave of telecom bankruptcies take the trend to a new level,
restructuring experts say. Now, executives are getting investment-banker-like
"success" fees just to liquidate their companies, not save them. And compared
with most industries in distress, the telecom sector is seeing a high number of
liquidations rather than reorganizations.
Martin Bienenstock, a restructuring attorney with Weil, Gotshal & Manges,
says the use of pay-to-stay bonuses has snowballed in part because entrenched
executives are still cheaper than many professional turnaround experts, who
often demand large "deal" fees to step in. All this comes on top of the millions of
dollars of fees already being paid to investment bankers to run the auctions or
find acquirers.
Executives are hoping to receive the bankruptcy bonuses even in the dire,
post-Sept. 11 economic climate. Web-hosting company Exodus
Communications Inc., which filed for Chapter 11 on Sept. 26, asked a
bankruptcy judge two weeks ago to approve the payment of $2.9 million in
retention bonuses over the first half of next year to about 14 "key employees"
and $14.5 million to all 2,300 employees as a reward if the Santa Clara, Calif.,
company pulls out of Chapter 11. The two bonus programs would double the
pay of several executives reporting directly to the chief executive, says Exodus
attorney Gregory Milmoe of Skadden, Arps, Slate, Meagher & Flom in New
York.
Not all creditors pay gladly. Some of them opposed such bonuses for
executives of Canadian fiber-optic company 360networks, including Chief
Executive Greg Maffei. The creditors insisted on renegotiating some terms of a
bonus pool. The company declined to comment.
Some bondholders are growing incensed by the bonus deals, which, once
approved, are almost impossible to revoke. Chaim Fortgang, a New York
attorney with Wachtell Lipton Rosen & Katz, who represents creditors
exclusively, succeeded in trimming the retention and incentive bonuses for
PSINet's Mr. Hobbs and other executives by a few hundred thousand dollars
each. "In an enterprise where catastrophic amounts of money were lost, the
notion that people should have to be compensated over and above what they
were already getting is offensive," he says.
Today, many companies in Chapter 11 such as ICG Communications, of
Englewood, Colo., are trying to forestall criticism by ushering in retention plans
for all employees before filing for Chapter 11. Creditors were agreeable to
ICG's proposal, in part because the new chief executive, Randy Curran, was an
outsider. He came from a welding machinery manufacturer that he had
shepherded through Chapter 11 in 1994. At ICG, he is receiving high marks in
the turnaround effort. He recently negotiated a $900,000 bonus if ICG emerges
from bankruptcy court by the end of the year, an amount that comes on top of
a $900,000 salary and performance bonus of as much as $900,000.
Winstar, a New York fixed wireless company with $3.6 billion in debt,
emphasizes that its $18 million "stay bonus" plan approved this June covers all
of the 1,000 or so remaining employees after 3,000 layoffs this year. Winstar
founder and chief executive William J. Rouhana Jr. is forgoing a stay bonus
himself.
Buried deeper in Winstar's motion, however, are details on several other
sweeteners worth as much as $31 million for Mr. Rouhana and 240 others in
the senior ranks. Mr. Rouhana, whose salary is $600,000, is eligible to receive
an "incentive" bonus of as much as $1.5 million depending on how much cash is
returned to banks. A spokesman says the number probably will not be that
high.
Write to Ann Davis at ann.davis@wsj.com1
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