It's nice to give a departing CEO a going-away present, but things may have gotten out of hand at NBC Internet (NBCI) .
In a move that puzzles some executive compensation specialists, the
-affiliated Internet company in February awarded CEO Will Lansing a $2 million bonus on top of the $6 million or more he already was likely to receive if the company were acquired this year. As if that wasn't enough, NBCi also made it easier for Lansing to depart with his full payout.
The extra $2 million in Lansing's contract appears especially generous in the context of NBCi's troubles: Its stock had declined 91% since Lansing's arrival 10 months earlier, and its business had deteriorated so much that nearly half its fourth-quarter revenue wasn't in cash but instead comprised payments such as dot-com stock. Plus, NBCi already was actively shopping itself around when the company decided to make it easier for Lansing to leave after a sale.
The $2 million bonus for Lansing, first disclosed in the company's revised 10-K filing for 2000, isn't routine, say compensation experts. "Without further explanation, on the surface, it looks tacky and unwarranted," says Kevin Murphy, professor of finance at
University of Southern California's Marshall School of Business
who has studied executive compensation for 20 years.
Lansing and NBCi Chief Financial Officer Tony Altig didn't respond to requests for comment, nor did the two members of NBCi's compensation committee: NBC CFO Mark Begor and independent director James Heffernan. An NBC spokeswoman said because the NBCi transaction hadn't closed, NBC executives wouldn't comment on any
Securities and Exchange Commission
filings related to the deal.
Lansing's revised agreement bore fruit after only two months. In early April, NBC parent
, owner of a 38.6% stake in NBCi, announced a deal to buy out NBCi's other shareholders and fold the operation into NBC.
So as a result of the sale, Lansing did pretty well for himself -- not just as a result of the February amendment, but also thanks to the terms in his original contract, dated a few days before he joined the company in March 2000.
Under the terms of the original contract -- nearly all of which was still in effect at the time of the NBC deal -- Lansing was in line to receive multiple benefits if, among other triggering conditions, NBCi was sold and he wasn't named CEO of the surviving company. He would receive restricted stock, now worth $575,000. He'd receive a salary of $2 million annually to cover the portion of his three-year contract remaining after a sale. And he would be
immediately forgiven a $4 million interest-free loan from NBCi that was scheduled to be forgiven after three years' of work at NBCi.
The February amendment, signed by NBCi Chairman (and then-NBC president) Bob Wright, added the $2 million bonus to Lansing's goodbye package and cut a major string attached to the original agreement. Rather than conditioning the severance deal on a change of control that plucked Lansing from his CEO position, the amendment eliminated the reference to the CEO post. In other words, even if an NBCi buyer had begged Lansing to stay aboard as CEO, he apparently could walk with his money.
Assuming that the NBC deal closes as expected this summer, Lansing is set to get a departure bonus worth about $9.5 million -- on top of the minimum $1.7 million annual salary and bonus that Lansing earned on the job. Meanwhile, NBCi shareholders won't enjoy quite the same payoff. NBC is paying $2.19 per NBCi share, well below NBCi's $44.63 price on the eve of Lansing's arrival last year. (NBCi is trading at about $2.16 a share, up from $1.50 just before the deal was announced.) NBCi was formed in November 1999 from community site
portal and certain of NBC's Internet assets.
To be sure, the Internet boom created some wacky dot-com compensation packages -- such as money-losing online grocer
agreement to pay former CEO George Shaheen $375,000 annually for life. And Lansing, a former GE executive who came to NBCi from
Federated Department Stores'
operation, was a reasonable choice.
But what strikes people as troubling is the timing of the February amendment, coming after NBCi's year of deterioration and simultaneous with the effort to shop the company. (In contrast, Shaheen's deal was written and disclosed before Webvan had gone public.)
As detailed in an SEC filing, NBCi executives started approaching other companies to explore business combinations in December and hired an investment bank in January.
"It does smell pretty bad to say, 'We had really huge problems, major losses, we're shopping the company, and decided to give a parting gift of $2 million to the CEO,'" says Austan Goolsbee, an economics professor at the
University of Chicago Graduate School of Business
who studies executive compensation.
Possibly, the amendment was designed to persuade Lansing to remain beyond his demanding 10 months at NBCi and captain the sinking ship through its rough seas. Amended agreements are typically put in place when an executive's stock options executive become worthless, losing their power as a retention tool, says David Swinford, managing director of executive compensation at consulting firm
Pearl Meyer & Partners
. Indeed, the options on 1 million shares that Lansing received upon his hiring are now worthless.
USC's Murphy says Lansing's provision seemed to be added at a time when the company was "certainly" anticipating a potential takeover. "The only pro-shareholder spin one can put on this agreement is if Lansing was in a position to veto a takeover attempt, this serves as a bribe to him not to resist so strongly." Though golden parachute provisions like Lansing's aren't remarkable, says Murphy, "this one stands out because he already had a lot of protection written into his contract."
One person who agrees is Xoom.com's former publisher, Bob Ellis, who served on Xoom.com's board and who holds a small amount of NBCi stock. He calls it "somewhat unusual" that the deal was renegotiated when the company was doing so poorly. "Usually you have to live up to the original deal," says Ellis. "You don't go back and give them $2 million when you're closing down the company."