Frontier changes CEO pay

Will Astor//April 16, 2010//

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Frontier Communications Corp. chairman and CEO Maggie Wilderotter started working under a new contract this month that ups her cash compensation and bonus potential but gives her no severance pay if fired and eliminates previously guaranteed stock awards.

Wilderotter’s new agreement superseded a three-year pact still in effect. Under the new terms, effective March 31, she will no longer be eligible for $9.9 million in severance pay to cushion her fall if she is terminated, whether with or without cause.

Also eliminated is the possibility of Wilderotter benefiting from gross-ups, common provisions in many high-level U.S. executives’ contracts under which companies agree to pay excise taxes on life insurance policies, cars, corporate jet travel and other perquisites thrown in to sweeten CEO pay packages.

The Frontier board’s decision to rewrite the terms of Wilderotter’s contract is a sign of changing winds blowing through many U.S. corporate boardrooms, said Daniel Tessoni, an assistant professor of accounting in Rochester Institute of Technology’s E. Philip Saunders College of Business.

An outside director of International Textile Group Inc. since 2005, Tessoni is a member of the ITG board’s compensation committee. He also sits on the board of Genesee Regional Bank and leads its audit committee. He previously was a director of ACC Corp.

Also gone from Wilderotter’s new contract are terms that had guaranteed her generous stock awards. Still, nothing in her new contract precludes stock grants. To the contrary, Frontier announced an intention to rely more heavily on them.

"Executives’ interests are aligned with our stockholders’ interests through the use of restricted stock awards rather than cash as a significant component of annual compensation," the company states in a proxy filed last week. "This encourages our executives to focus their attention on decisions that emphasize long-term returns for our stockholders."

Stock grants would henceforth be made only as a reward for meeting or exceeding specific performance targets, however. Future bonus awards for Wilderotter and other top officers would have larger equity components, the proxy states.

Wilderotter’s 2008 compensation totaled $7.1 million, $1.8 million of which came in cash base pay and bonus payments. Her stock awards totaled $5.3 million. Wilderotter’s $4.8 million in compensation in 2009 included $3 million in stock.

In exchange for forgoing the old contract’s safety net and giving up some possible tax perks, Wilderotter gets a 13 percent hike in base pay to $1 million. She also gets a chance to earn up to an additional $1.35 million cash bonus, a $350,000 increase over the maximum $1 million bonus in her old contract.

Neither the company’s directors nor Wilderotter would comment on the new employment contract, said Frontier spokeswoman Brigid Smith in replying to a request for interviews.

Wilderotter agreed to the revised terms after extensive negotiations with the board’s compensation committee, Frontier states in a Securities and Exchange Commission filing. The committee hired an outside attorney to guide it through the salary talks.

Frontier states in the filing that the committee "had to balance the need to retain and motivate Mrs. Wilderotter and address (her) expectations based on provisions (the committee) previously agreed to … with the need to address current best practices and concerns raised by stockholders as it relates to executive compensation."

Frontier directors are not alone in trying to manage a balancing act, Tessoni said. Public and private company directors are struggling with a growing public perception that U.S. CEO and upper-management pay is bloated and in some cases undeserved. And like the Frontier board, directors and especially compensation committee members increasingly find themselves on the horns of a dilemma: How to weigh the need to maintain an image of corporate citizenship in matters of executive pay against the need to retain the best and most effective management.

High-quality management does not come cheaply for a reason, Tessoni suggested.

"If you look at these people, they are most often individuals of no small accomplishment," he said. "I don’t see any incentive (that) board compensation committees would have to design plans that reward CEOs with unjustified compensation."

On the other side of the equation, Tessoni said, corporate board members are not just feeling the heat of the public’s ire over excessive CEO pay. Directors also are pressured by dictates coming down from federal Special Compensation Master Kenneth Feinberg, the so-called pay czar appointed by President Barack Obama to rein in pay packages of companies taking federal bailout dollars.

Feinberg has no authority over companies such as Frontier that have neither needed nor taken bailout cash. But he has outspokenly stated his intention to use his position as a bully pulpit to advocate for executive pay practices that discourage excessive risk taking and encourage a focus on longer-term gains.

Feinberg has also spoken out against lavish perks such as country club memberships and corporate jet travel. Corporate directors have heard Feinberg and are looking for ways to be ahead of the curve, Tessoni said.

Wilderotter’s revised compensation terms indicate that calls for greater transparency and less generous CEO pay are being heeded, at least in the near term.

CEO pay at 199 of the largest publicly held U.S. companies declined by an average of 9 percent in 2008 and 13 percent in 2009, the New York Times reported earlier this month. The article was based on a study the newspaper commissioned by Equilar Inc., an executive compensation research firm based in Redwood Shores, Calif.

In a separate analysis of 252 U.S. public companies Equilar released in March, the compensation firm found that median total bonus payouts to CEOs last year fell 12.6 percent from $930,133 in 2008 to $812,799 in 2009. The firms’ CEOs on average saw a 10.3 percent decline in performance-based bonuses and a 20.5 percent drop in discretionary bonus payouts.

Because companies continue to file proxies with new information, results of the March study must be seen as preliminary, Equilar states. Still, it adds, early findings show that "numerous companies are altering or redesigning performance goals in the face of the recession."

The steadiness of the trend is uncertain. Old ways could be reasserting themselves. Bonus awards went up among year-end proxy filers, Equilar found.