A federal judge and a bankruptcy judge on Monday approved a pay package for WorldCom Inc.’s (WCOEQ) new chief executive, Michael Capellas, after the company slashed roughly 23% off of his original proposed compensation.
Under the three-year contract valued at $20 million, Mr. Capellas would receive an annual salary of $1.5 million, a signing bonus of $2 million and a further $1.5 bonus if he meets certain performance targets.
But instead of the $18 million in restricted stock he was slated to receive upon the company’s emergence from bankruptcy, he would now receive $12 million in restricted shares, with an additional $6 million in restricted stock only if he meets performance targets.
U.S. District Judge Jed S. Rakoff in Manhattan, who is presiding over the Securities and Exchange Commission’s $9 billion fraud case against WorldCom, called the pay package “eminently reasonable.”
Last week, he had criticized an earlier compensation package as “problematic” and ordered a court-appointed monitor to hash out a new pay plan with WorldCom and Mr. Capellas.
U.S. Bankruptcy Judge Arthur Gonzalez, who oversees the company’s Chapter 11 bankruptcy filing, also approved the compensation package at an unusual hearing in Manhattan federal court attended by both judges.
Mr. Capellas, the former chief executive of Compaq Computer Corp., told the judges: “There’s much to be done, and I’m anxious to do it.”
WorldCom, which filed for bankruptcy protection in July, has said it inflated profits by at least $9 billion during the past three years.
The company is still under a criminal investigation by the Justice Department. To date, five former executives have been indicted or charged with fraud as part of the probe. All have pleaded guilty except for former chief financial officer Scott Sullivan, who is reportedly in talks with the government about striking a plea deal.
The court-appointed monitor, Richard Breeden, who had previously rejected several terms of the package as “grossly excessive,” told the judges that he was able to have “extremely constructive and harmonious” discussions in the last week with Mr. Capellas.
Under the terms of the pay plan, Mr. Capellas must follow the company’s new model for corporate governance that calls for transparency “in all that it does” and truthfulness in all communications to the marketplace, Mr. Breeden said.
“There are no gimmes in this case,” he said during the proceeding. “The high-jump bar has not been set six inches off the ground.”
In addition, the guaranteed $12 million in restricted stock that Mr. Capellas would receive has a vesting period of three years, and if he exercises any stock options, he can’t sell that WorldCom stock for a 12-month period.
Under the terms of the package, Mr. Capellas would be guaranteed roughly $6.667 million a year in salary, bonuses and restricted stock.
WorldCom attorney Paul Curnin spoke briefly during the proceeding, telling the judges that the telecommunications company had been a “victim” of its former officers.
In approving the package, Judge Rakoff noted that WorldCom’s former chief executive, Bernard Ebbers, had received a $10 million bonus in 2000 on top of his regular salary, plus hundreds of millions of dollars in company loans, “before anyone knew about the massive alleged fraud in early 2001.”
He also pointed out that WorldCom has only reached a partial settlement with the SEC and still faces fines for accounting fraud.
As for Mr. Capellas’ job, Judge Rakoff said the new CEO’s possibly unprecedented challenge is “to take a huge company that is tainted by a disreputable past and transform it if you can into a model of what a good company should be.”
Mr. Capellas told reporters after the hearing that he hopes the new ethical guidelines outlined in the compensation package “will cascade … through the entire organization.”
He added that WorldCom would issue a 100-day plan in early January outlining the company’s goals. He plans to install new management and board members and create advisory panels to help guide the company.