Now, the $51-Million Severance Question
Pay: Enron's Chapter 11 status may jeopardize compensation for ex-CEO Kenneth Lay.
By NANCY RIVERA BROOKS and JAMES F. PELTZ
LA Times Staff Writers
January 25, 2002
Ousted Enron Chief Executive Kenneth L. Lay could get a severance package worth at least $25 million--and perhaps exceeding $51 million--although his ability to collect that payday is clouded by the company's Chapter 11 bankruptcy filing.
Lay, who resigned Wednesday under fire, also could get parting gifts that include a lifetime annual pension of nearly $475,000, a $12-million life insurance policy and payment of taxes on any severance pay.
But Lay may never see a dime because, with most of Enron Corp.'s operations tangled in U.S. Bankruptcy Court, he slipped overnight from corporate commander to yet another among the thousands of Enron creditors.
"I would be incredulous if he got any money, and if he did take any money he'd be spending the entire amount on bodyguards," compensation expert Graef Crystal said.
Lay, who received more than $200 million in compensation from Enron since 1999, has been accused of misleading shareholders about Enron's finances as it plunged toward ruin last year.
In his 15 years building Enron from a small pipeline company to the world's largest energy trader, Lay was paid handsomely, and his severance agreement and other benefits reflect that, according to documents on file with the Securities and Exchange Commission.
Exactly how much Lay might receive in severance is only vaguely spelled out in Enron's most recent proxy statement, filed with the SEC in March. Enron representatives declined to clarify the matter and hinted that the payout might not be a sure thing.
"The terms of Mr. Lay's separation are still being determined," Enron spokesman Vance Meyer said.
Three Times His Salary and Bonus, Plus Lay's severance is based on payments he received in 2000, multiplied by the three full calendar years left on his contract. That means Lay would be entitled to a lump sum of about $25 million, or three times his 2000 salary of $1.3 million and bonus of $7 million.
That $25-million tab would be further swelled by an unspecified "long-term grant value" received in 2000, according to the proxy statement. Compensation experts said that could include the $7.5 million of restricted stock and a $1.2-million cash payment that Lay also received in 2000, which Enron called "long-term compensation."
If that assessment is correct, the total payout would be $51 million.
The SEC filing also said that Lay is entitled to a lifetime pension that would have been valued at $475,042 if Lay, 59, had stayed until 65. In addition, the company said it would pay all taxes on Lay's severance if the IRS rules that the severance package is an "excess parachute payment."
What is more, Lay, as of the end of 2001, owns a $12-million life insurance policy that Enron helped him buy, according to Lay's 1996 employment agreement, also filed with the SEC.
Lay also remains as an Enron director, and they are paid at least $50,000 a year.
Compensation experts said it is unlikely Lay will get his severance package and most of his pension because all preexisting contracts are invalidated by the bankruptcy filing and the fact that Lay technically resigned, rather than being terminated. But the refusal of the company to rule out a severance is "troublesome," Crystal said.
In any event, even as Enron was hiding losses in a murky series of off-the-books partnerships and using questionable accounting on its way to the nation's largest bankruptcy filing, the company served another purpose that nearly was hidden from public view: It effectively was a personal bank for Ken Lay.
The company last year provided Lay with an unusual line of credit of as much as $7.5 million that he used repeatedly, often to help cover soured investments he made elsewhere, his lawyer has said. This despite the fact that Lay has received more than $200 million in compensation from Enron since 1999.
And the collateral securing the line of credit apparently was Lay's own Enron stock, shares of which were showered on him by the thousands either directly or through stock options that were part of his compensation package during Enron's explosive growth in the late 1990s.
Lay typically repaid the credit line with his Enron shares, then would draw down the loan again and repeat the process, Earl Silbert, Lay's lawyer, said. Lay did this on 15 occasions between February and October, just as Enron's collapse was accelerating.
Lay Expected to Face Huge Legal Bills
Lay's apparent financial problems, signaled by his repeated tapping of the credit line, are compounded by the specter of huge personal legal bills facing him. Lay is the subject of more than 50 lawsuits resulting from Enron's financial meltdown, as well as numerous federal investigations.
His credit line is a perk that has surprised several experts in executive compensation, a field already chock-full of various stock options, bonuses and other benefits paid to Corporate America's leaders.
To have a standing credit line for an executive who can pay back the loan with stock the company has awarded him is "very unusual," said Alan Johnson, managing director of Johnson Associates, a compensation consultant in New York. The arrangement, approved by Enron's board, allowed Lay "to treat the company as a personal piggy bank," he said.
Bill Coleman, senior vice president of compensation at Salary .com, an Internet compensation site, said that "there is something fundamentally odd about a company loaning money to an executive and collateralizing it with the company's own stock."
"Why is Enron in the business of loaning money?" he asked.
Company Loans to Top Management
It is common for a company to make one-time loans to senior managers--say to help them relocate or to buy the company's shares. Sometimes corporations will even waive the interest, or total repayment, as part of the executive's future compensation. Indeed, Enron in 1997 made a $4-million loan to Jeffrey K. Skilling, its chief executive who abruptly quit in August.
Also, the dollar amount of Lay's credit line isn't sizable relative to the billions of dollars of debt that sank Enron. After a series of financial setbacks that sent its stock plunging and eroded investors' confidence, Enron filed for Bankruptcy Court protection Dec. 2, citing more than $31 billion in debt and $50 billion in assets.
The stock, which traded around $80 a share a year ago, now trades for just pennies, and the options that Lay and others still have are virtually worthless.
Silbert did not return calls requesting elaboration on Lay's arrangement, and Enron spokesman Meyer said he could provide no further details.
No one has suggested that Lay's arrangement involved any wrongdoing, and Enron's proxy statement last year disclosed--in two sentences--that the credit line existed. About the same time that the proxy appeared, in March, was when Lay was starting to use the credit line repeatedly.
He typically repaid it by returning shares of his Enron stock to the company, said Silbert, who said he made the public disclosure to offset speculation that Lay was aggressively dumping shares because the executive knew the company was headed toward disaster.
But that disclosure--coming on top of so many other revelations, including that some top Enron executives had financial interests in partnerships that helped finance Enron's operations--adds to the appearance that "there is an awful lot of self-dealing going on in this case, and this is symptomatic of that," said Rajesh Aggarwal, an assistant business professor at Dartmouth College.
In September, at the same time Lay was using his Enron stock to support his line of credit, he urged company employees to buy more shares only weeks before Enron disclosed the worst financial results in its history.
The stock then was selling for about $25 a share, and two months later for $4 a share. The stock's collapse wiped out billions of dollars of investor holdings and the retirement savings of Enron employees who owned the stock.
In general, Lay's credit-line arrangement "is not one that's shareholder friendly," said Salary.com's Coleman. The whole point of executive compensation is to give top managers incentives to build the company and boost its stock price for all shareholders, he said, yet Lay's credit line gave him protection from having to reach into his own wallet even when Enron's stock nose-dived.
"He doesn't get hurt," Coleman said.
The credit line served another purpose not afforded the average Enron stockholder, said Kevin Murphy, a finance professor at USC. Letting Lay repay his credit line with Enron stock "allowed him to get liquidity out of his stock that was easier than going to the open market," he said. In other words, Lay didn't have to first sell $4 million or so of Enron shares on the stock exchange--an event that likely would have depressed Enron's price on the market--each time to pay back his Enron loans.
"That gives him an advantage that most stockholders don't have," Murphy said.
The credit line also raises questions about the amount of risk Lay was personally accepting at the same time he was leading Enron's fight for survival.
It's unclear why, in light of his enormous compensation at Enron, he was having to repeatedly tap his credit line.
Besides his salary and bonuses, Lay realized $43.8 million from stock options that he cashed in during 1999, and $123.4 million from exercising options in 2000, according to Enron's government filings.
Lay sometimes borrowed from his Enron line of credit last year when he expected to face margin calls from other lenders, Silbert has said. That meant he had bought other investments partly with borrowed funds--or on "margin"--and now had to repay some or all of those amounts because their underlying investments had tumbled in value.
Lay recently put several properties up for sale, including vacation homes in Aspen, Colo.
Now that Lay is gone, Enron is searching for a restructuring specialist to run the company. Sources close to the company said an interim chief executive will be announced in the next few days.
Enron reportedly has narrowed the candidates for its interim chief executive, and the front-runners are three New York companies that specialize in corporate turnarounds, according to Bloomberg News. Those companies--Alvarez & Marsal, Glass & Associates and Zolfo Cooper--all declined to comment. |
