Telecom boards: Wake up!

It’s not news that many telcos were grossly mismanaged during the last decade. Unfortunately, it seems that many telecom corporate boards still don’t get it when it comes to running companies in this millennium.

Sanity check: Research firm Glass Lewis recently conducted a review of CEO paychecks at 444 public companies. They divided CEOs into “underpaid” and “overpaid” by assessing both CEO compensation and company performance relative to peers. “Underpaid” CEOs made less than the average for their peer groups while their companies performed better than average. (Compensation included not just paychecks but bonuses, additional compensation and recently granted stock options.)

“Overpaid” CEOs were the opposite. They made more than average while their companies’ performance was below average. Performance was rated based on six common financial assessments, and corporate “peer groups” were based on a mix of companies of similar value, similar size in the same industry and companies in the same segment of an industry.

In some respects, the “underpaid” and “overpaid” classifications are rough proxies for how well managed a firm is. It’s simply not good business practices to overpay employees – even the CEO. A corporate board that lets cronyism, executive greed, or out-and-out lethargy override sound business practices in one area is highly unlikely to be a shining example of disciplined business practices in other areas.

You can guess where I’m going with this. Not one telecom CEO made it into the “underpaid” CEO ranks. But the CEOs of Sprint, Verizon, Qwest and SBC all showed up in the ranks of the overpaid. By Glass Lewis’ figures, all four companies underperformed in 2003 – while reportedly paying their leaders record rates. Qwest’s Richard Notebaert made $9.6 million last year, with Verizon’s Ivan Siedenberg coming in at $15.5 million and both SBC’s Edward Whitacre Jr. and Sprint’s Gary Forsee bringing home between $25 million and $26 million. Qwest and Verizon performed in the lowest quartile of their peer groups, while the other two performed in the lower half.

Don’t get me wrong, I have nothing against lavish executive pay – particularly for CEOs who deliver. I don’t even fault CEOs for negotiating the highest possible compensation for themselves. But a corporate board’s job is to provide executive oversight, and a board that rewards mediocre performance with record compensation is asleep at the switch.

Not every telecom board is so sloppy. I was delighted to see that the boards of leading telcos and equipment providers such as Avaya, AT&T, Cisco and Lucent appear to believe in performance-based pay. Hats off to Nortel’s board, which recently took the difficult and painful – but necessary – step of firing the firm’s CEO for financial irregularities that occurred on his watch. Finally, MCI retained overseer Richard Breeden to closely manage the carrier as it emerges from bankruptcy – including keeping a lid on CEO Michael Capellas’ compensation requests. Way to go, guys. Let’s hope the rest of the telecom industry learns from your example.