No one's happier with the market's rejection of pro forma accounting than Nortel ( NT) executives. Of course, with a $50 million annual bonus pool you'd be smiling too.Last Thursday, the Brampton, Ontario-based, phone gearmaker posted a first-quarter 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."
Generally speaking, Ellig says shareholders are "owed some degree of confidence in their executives. There needs to be some sense that executives share the pain as well as the gain with shareholders. If by sticking with rules means executives are getting millions, that doesn't bother me. But if they are changing the ground rules and lowering the targets as they go, that presents a problem." What's probably more interesting, from a Wall Street perspective, is just how quickly the benefits of the company's endless cost-cutting -- a two-year-long effort that has eliminated tens of thousands of jobs -- were neutralized in the latest quarter by the generous executive incentives. Indeed, in a perfectly apt twist, the company ate up the quarter's would-be profits by paying out $80 million toward bonuses and stock compensation. On a conference call with analysts, CEO Dunn declined to say whether the bonuses would continue to offset the cost savings from the firings for the rest of the year. Some analysts said the savings generated by years of steep cuts will likely exceed the bonus payout over the rest of the year. Still, $50 million's a lot of money. To help put the bonus pool in perspective, it's worth noting that the company last booked a quarterly profit in the fourth quarter of 1999. Back then, net income amounted to $172 million -- on $6.6 billion in sales, or three times the company's current revenue level.