Nortel ( NT) minced few words Wednesday as it put an end to the turbulent Frank Dunn era.The Canadian telecom gearmaker shocked Wall Street by
Just three months later, Nortel delivered
surprising profits based on a controversial tally of earnings. Adding to the drama, some $50 million in return-to-profit bonus money was riding on the results and the company's ability to stay in the black for the whole year. Then in October, Nortel turned in another stunner . Dunn inexplicably called for an audit of all accounting work dating back to 2000. The preliminary finding showed about $900 million worth of charges had been misbooked and that financial reports for that period would have to be restated. Nortel said Wednesday that results for 2001, 2002 and 2003 will have to be restated again based on the preliminary findings of an independent review. The investigation suggests that the company's reported profit for the first half of 2003 will be wiped out, and that its overall profit for 2003 will be cut in half. On a conference call Wednesday with analysts, new CEO Owen was asked if the company would take back the profit bonuses. Owen said that he wouldn't be able to answer that until after the review was finished. But the enticing cash prize seems to offer an explanation for Nortel's unbelievably good fortune in early 2003. "Nortel was making a profit when no one else in this business was," says Duncan Stewart, a money manager with Tera Capital who has a Nortel stake. "If this is as it appears, they may have given themselves a bonus in a fraudulent manner." Nortel didn't make Dunn or a Dunn representative available for comment. Reached at home, Dunn's wife said he would have no comment. If the bonuses perverted the profit motive, Nortel may share in the some of the responsibility, says executive pay expert Bruce Ellig, author of The Complete Guide to Executive Compensation. Companies like Enron and General Dynamics ( GD) ran into trouble by tying bonuses to specific targets like stock prices, says Ellig.
"If you've made the reward so appealing, it's almost inevitable that management will be tempted to use untoward means to obtain their goal, even if they are good people to begin with," says Ellig. "When you put so much emphasis on incentive you may get the desired result, but it may not be valid," says Ellig.