With his underdog cell-phone service turning into a fan favorite, Nextel (NXTL) Chief Tim Donahue is on a roll.
Now shareholders may be wondering what he'll do with his winnings.
That issue became more pressing with last week's word that Nextel had renewed Donahue's employment contract. The new deal bumps up his salary by 43% and provides a million-share gift on top, according to a Friday filing with the
Securities and Exchange Commission
. All things told, the value of the arrangement, which runs through 2006, could reach into the tens of millions of dollars.
Given the events of the last year, few investors would dispute Donahue's worth. Having posted surprisingly strong growth in subscribers, sales and profits last quarter, Nextel has rapidly rebounded from being the wireless industry's David to the Goliath of business services. Wall Street has taken note, more than tripling the value of Nextel stock off last year's miserable low.
Still, not everyone's feeling ecstatic about the CEO's new paycheck. Some observers point out that Donahue has been CEO since 1999, which means he also oversaw the 93% plunge in Nextel shares that preceded the recent revival.
"If I were a shareholder, I'd question how expensive it is to keep him," says Paul Hodgson with the Corporate Library, a corporate governance advocacy shop. "The stock is certainly up, but it's coming from quite a low." Nextel rose 16 cents Monday to close at $17.90.
There's nothing low about Donahue's new compensation arrangement. According to the contract, Donahue will collect a base salary of $1 million, an annual bonus of up to $1.5 million, a long-term bonus of $2.7 million and options for 500,000 shares.
But wait, there's more: The executive also gets 1 million deferred shares worth close to $18 million at recent prices.
Donahue, who wasn't available for comment Monday, struck a gracious note in Friday's announcement of the employment contract. "At Nextel, I'm surrounded by the most dedicated, innovative and results-driven team I've ever seen," the executive said in a press release.
This left some people wondering whether Donahue was referring to his employees or the team of lawyers who helped ink him his sweet pay contract.
What stands out in Donahue's pay, says Hodgson, are the stock awards, which make up the largest portion of the package. Unlike options or incentive bonuses, stock gifts have no strings attached and represent free money for Donahue.
"These awards aren't set up as performance incentives," says Hodgson. "They seem to be for retention, to make sure he doesn't leave."
A Nextel spokeswoman says it's not uncommon for tech companies to have lower salaries "balanced" by stock and bonuses. All Nextel employees have received stock options every quarter, and that helps "create a strong team working environment."
There's no doubt that this summer's resurgence in Nextel shares has improved the working environment at the Reston, Va., company.
Back From the Brink
After Nextel shares powered into the high double digits during the telecommunications boom of 1999-2000, Wall Street's renewed interest in profitability and balance sheet health brought the stock screaming back to earth. By this time last year Nextel shares were fetching just $5.05 each, punishing the portfolios of shareholders large and small.
Donahue was no exception. But now, with Nextel shares hovering around their postboom highs, he is in a position to capitalize. In 1999 he received a grant of 600,000 deferred shares before taking account of a June 2000 2-for-1 stock split. Those shares fully vest Sept. 1.
Now investors will be thinking of that team spirit as Donahue decides how to handle a cashout opportunity estimated at $20 million.