Bonus Payout Raises Hackles on Nortel Profit

Pro forma earnings have clearly outstayed their welcome on Wall Street, what with regulators trying to stamp out nonstandard accounting and promotional communications. In keeping with that sentiment, Nortel said in Thursday's release that it was done with pro forma numbers. That said, the apparent intent of the Nortel filing is clear: To spur bonus payments, the company must generate a profit from ongoing operations.

But on Thursday Nortel emphasized it had reached profitability even though its continuing operations produced a loss of $136 million, or 3 cents a share. The first quarter reached the black only thanks to a $190 million contribution from discontinued operations. The decision to pay bonuses based on a profit that didn't come from the main business struck some observers as odd.

"The definition of profitability needs to be clear up front," says Bruce Ellig, author of The Complete Guide to Executive Compensation. "It can't change from GAAP one time to pro forma the next without good reason. If it appears to be a way to put money into an executive's pockets, then shareholders might have a problem with that."

Cashing In

While passing the profit milestone triggered a one-time cash bonus for all 36,000 Nortel workers, senior executives stand to do better by far. They'll get two much larger bonuses this year if the company maintains its newfound profitability, according to a federal filing.

About 30 unnamed senior executives who received 20% of their potential bonus in the first quarter will get another 40% in the second quarter and 40% at year-end, should the company stay profitable. The cut for CEO Frank Dunn will be $5 million, according to one person familiar with the agreement.

The bonus would be quite a reversal for Dunn. He and his fellow executives received no bonuses last year due to Nortel's horrid performance. Dunn had to make do with his $825,000 salary and his 750,000 new stock options.