CEO Compensation at Qwest (Graded A+) - use as a guide only - 34066

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CEO Compensation at Qwest

In April 2002, despite posting a net loss of $4 billion for the previous year and being strained by a $25 billion debt, Qwest Communications awarded its CEO, Joseph Nacchio, a yearly compensation and benefits package of $217.3 million, including pay and potential gains from stock option grants. At the time of this writing, Qwest shares were 83 percent off their 52-week high.

In 2001 Nacchio received a salary of almost 1.2 million, a 27 percent increase over 2000, but his bonus dropped 32 percent to 1.5 million. In addition, he obtained at least $74.5 million from exercising stock options and long-term incentive pay of $24.4 million. Other compensations of $229,705 included a $136,745 allocation for use of corporate aircraft. However, stock options, with a potential future value of $115.6 million, became worthless by September 2002, according to the Investor Responsibility Research Center, since Qwest’s share price dropped lower than the $16.81 exercise price of the options. So, as of September 2002, the actual worth of the compensation and benefits package for the year was approximately $101.7 million.

According to the Investor Responsibility Research Center, this was one of the top pay packages for 2001, based on an analysis of CEO pay at 267 companies with revenue of $1 billion or more. A Qwest spokesperson, however, said that Nacchio’s pay is on a scale with other firms trying to retain officers and that Qwest has outperformed many competitors. (See USA TODAY, April 10, 2002.)

In 2002, despite a 30-month-long stock market slump, there appeared to remain a wide disjuncture between CEO pay and company performance. There was at the time little evidence of substantial CEO-pay-package cuts even in companies that performed poorly. Executive salaries generally rose, despite an economic climate of low stock prices and greater scrutiny of directors and executives as a result of corporate financial and fraud scandals. While average worker salaries were rising just above 3.6 percent, many CEOs were receiving double-digit salary increases, bonuses, stock option grants potentially worth millions, and benefits such as company-owned apartments. (See USA TODAY, September 30, 2002.)

Questions

1.      Is Joseph Nacchio’s yearly compensation and benefits package of $217.3 million fair, unfair, or neither fair nor unfair?

2.      As a matter of fairness, should a CEO’s pay be reduced when: (a) other employees are forced to take a reduction or (b) when the company’s profit margin is lower than anticipated under the society’s economic condition?

3.      As a matter of fairness, should the salaries of American CEOs be substantially reduced below their present level? If so, who should be authorized to lower the salary?

Solution Description

A+++++++++++

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