Verizon's CEO Compensation Change

Wednesday's Wall Street Journal featured an article in the Money section about Verizon's CEO's new compensation package.

After reading what details are disclosed, I am left with a mixed view of Ivan Seidenberg's new compensation arrangement.As I understand it, the new arrangement ties Seidenberg's pay to both S&P-related return targets, over an undisclosed time period, as well as the phased implementation/rollout of Verizon's new fiber optic network. This use of the capital spending plan seems, to me, to be somewhat disingenuous.

Blogger is not being very cooperative today, so I am unable to paste a 5-year chart of the company's stock price, compared to the S&P. I will attempt to do so in the next day or so However, suffice to say, the S&P has performed significantly better than Seidenberg has over the past five years.

For instance, here is a quote in the article attributed to a Verizon spokesman,

"If Mr. Seidenberg's compensation were based solely on the stock performance, he would have a disincentive to make the investment that we believe is necessary...This is not a provision to make up for poor stock performance, itÂ’s a provision to make sure we do the right thing for the long-term health of the company."

Here's what I donÂ’t understand. If rolling out their fiber optic network results in a drop in the total return to shareholders, then perhaps it's not actually a good idea. If it were properly explained, and justified, would it not be seen as a positive attribute by investors?

To hide behind the excuse that Seidenberg could benefit more by giving the company's massive investment program short shrift is to suggest that it may not really be such a good idea, anyway.

By making it part of the CEO's compensation package,I wonder if this is management's way of shifting the responsibility for deciding to implement the project onto the board. This way, Seidenberg can always point to his board, and their compensation package for him, and say that they thought the project was the right thing to do, even if it turns out badly.

It sounds good to tie Seidenberg's compensation partly to the S&P500 return, but details are scarce as to over what timeframe. If it's too short, then beating the S&P becomes a much easier task than you might suspect.Basically, I think that, if the Verizon fiber project is a good investment, then, yes, the compensation changes are probably beneficial for shareholders. But why worry whether itÂ’s good or not? If it's not thought to be a wise move, why even do it?In the end, though, if the fiber investment is important, and investors don't think so, why should the CEO get paid for doing something that destroys existing shareholders' wealth? It sounds like more fuzzy thinking on corporate governance and commitment to wealth creation for 'every' prospective shareholder.

The WSJ piece quotes one Paul Hodgson, described as a compensation analyst at the Corporate Library, as saying, "It's what CEOs are paid to do- to damnlong-term bets and damned the stock price."

I would disagree emphatically with his statement. I believe that the job of a CEO is to provide consistently superior returns for shareholders, in order to do two things. First, to generate consistent performance, in order not to favor any particular group of shareholders with respect to their temporality. Second, to earn consistently superior returns so that shareholders have a reason to own shares of the company, rather than simply own shares of the S&P500.

While there seems to be some benefit to including the S&P metric in Seidenberg's compensation package, the inclusion of the implementation metric for the company's fiber optic project smacks of shifting the risk of, and justification for the project from the firm's management, to its board and shareholders.