Dear Association Member:
This email applies to only members who own Verizon Stock.
We urge you to vote contrary to management’s recommendation on two important items on Verizon’s proxy card for the upcoming Annual Meeting on May 7th in Louisville:
VOTE AGAINST Item 3: Advisory Vote on Executive Compensation
VOTE FOR Item 8: Separate the Roles of Board Chairman and CEO
We believe that Verizon’s Board needs to hear that shareholders want enhanced accountability and compensation policies better aligned with shareholder interests.
Item 3: Vote AGAINST Approving the Senior Executive Compensation Package
Key components of executive pay at Verizon are badly out of line with best practices for performance-based compensation, in our view. A study by the Corporate Library singled out Verizon for two consecutive years as one of 12 “Pay for Failure Companies” with the worst combination of excessive CEO pay and negative shareholder returns over the most recent five-year period. (“Pay for Failure II,” May 2007).
While returns were above average last year, we believe the Company’s compensation structure should include more challenging performance hurdles and fewer windfall termination benefits.
Performance Shares a ‘Gimme’: The Corporate Library’s 2008 update on “Pay for Failure” companies extended its criticism of Verizon Board’s compensation policies: “Verizon’s performance stock units (PSUs) continue to pay out for TSR performance below the median. … the company would have to perform below the 20th percentile for executives to receive nothing” for 2008. In fact, for the 2008-2010 cycle, 100% of the target PSU award is paid out for median performance – that is, for Total Shareholder Return at the 50th percentile among “Related Dow Peers” (proxy at p. 35). Such low expectations are what golfers call a “gimme.”
Golden Parachutes: If CEO Ivan Seidenberg is terminated or even retires, he receives a $30.5 million severance, more than five times his base salary plus bonus. He receives $29.2 million after a change in control if he is not terminated. President & COO Dennis Strigl would receive an even larger $40 million if he terminates after a change in control – a platinum parachute that is 13 times his base salary plus bonus. (See proxy pp. 47-48).
Golden Coffins: Upon termination of employment due to death, Seidenberg would receive an additional $35.5 million, while Strigl would receive $50.8 million. This is over and above any pension or deferred compensation (which pay out tens of millions more).
Executive Pensions: In 2006 Verizon froze its defined benefit SERP, which provided senior executives with a company contribution equal to 32% of base salary and bonus. While not as generous, the new nonqualified defined contribution plan continues to be very costly, applying benefit formulas more generous than those that apply to rank-and-file managers or employees. For example, Seidenberg received $814,000 in SERP compensation for 2008: A $491,226 Company contribution to his non-qualified plan for 2008 and, in addition, $322,862 in “above-market earnings” on his non-qualified plan assets. (Compensation Tables, pp. 40-41).
Tax Gross-Ups: Since Verizon executives apparently find it burdensome that the IRS treats company payments for personal travel and life insurance as income, the shareholders reimburse them for taxes as well – a widely-criticized practice known as “tax gross-ups.” (Proxy pp. 41, 51).
To support its recommendation, the Board describes how it has reformed Verizon’s pay practices in recent years. What’s not said is that at least four of the seven listed reforms were adopted only after they received substantial votes as shareholder proposals – proposals the Board initially opposed. In our view, pro-shareholder compensation policies are adopted only if shareholders send a strong message. A vote AGAINST Item 3 is precisely the nudge the Board needs.
Item 8: Vote FOR a Policy Separating the Roles of Board Chairman and CEO
Multiple studies have found that shareholder returns are substantially higher on average at firms with non-executive chairmen.
A 2006 Booz Allen Hamilton study of the world’s 2,500 largest public companies concluded: “Non-chairman CEOs are now the best performers. . . . In North America over the last three years, non-chairman CEOs produced shareholder returns three times as high as those of CEO/chairmen.” (“CEO Succession 2005: The Crest of the Wave”). Booz Allen found that among both American and European companies, firms that separate the roles of chairman and CEO had returns 5 percentage points higher on average than companies with CEO/chairmen.
A 2006 report from Moody’s similarly concluded that “arguments against independent board leadership are outweighed by advantages offered by clarity of accountability and the strengthened ability of independent directors to respond quickly in a crisis.”
We believe that an independent Board Chair is particularly overdue at Verizon. As the Corporate Library documented in its “Pay for Failure” studies cited above, for many years the compensation of Verizon’s senior executives has been disconnected from returns to shareholders, in our view.
The Board should be fully responsible and empowered to hold the CEO accountable to the company’s owners. But when the CEO is Chairman of the Board, we believe that lines of accountability are blurred, that compensation is less tightly aligned with shareholder returns, and that the decision to replace a poorly-performing CEO is skirted or delayed.
While the Board’s appointment of a Lead Director is certainly a positive development, we believe there is no substitute for a non-executive Chairman.
Please vote your shares AGAINST Item 3 and FOR Item 8.
Your proxy voting card and proxy material will be sent to you either from Verizon or your broker around the beginning of April. If you don’t receive your proxy material, contact your broker or Verizon’s investment group by going to http://investor.verizon.com/contactus/ or calling 1-800-631-2355.
C. William Jones
President & Executive Director