Performance Bonus Out of Reach?   Some Companies Move the Target

                   By JESSE DRUCKER
                   Staff Reporter of THE WALL STREET JOURNAL

                   It turns out there's an easy way for companies to pay bonuses when they miss the performance targets on which the payouts are based: lower the targets or ignore them altogether. According to recent proxies filed with the Securities and Exchange Commission, AT&T Wireless Services Inc., Sun Microsystems Inc., UST Inc. and Estée Lauder Cos. changed or ignored the original rules -- resulting in millions of dollars in bonus-plan payouts despite revenues or earnings lower than originally forecast. The beneficiaries almost always included top executives. Sometimes the relaxed rules also benefited the entire company or at least filtered down to middle management.

                   Companies that change bonus rules in midyear aren't breaking any laws, and in many cases, the bonuses are less than what would have been paid if the original targets had been kept and met. But corporate governance experts question whether some companies are determined to pay bonuses no  matter what, even as shareholder losses and employee layoffs keep mounting. Some say the moves amount to changing the rules in the middle of a game when it becomes apparent your team is losing.

     "It would seem to be a very dangerous practice to just lower the bar," says Carol Bowie, director of  governance research at the Investor Responsibility Research Center, a Washington research and advisory firm for institutional investors. "There is a risk that by doing this it reinforces the idea the bonus is an entitlement. It then becomes more and more difficult to provide meaningful links between pay and performance."

      Some companies, however, say the bonuses are a legitimate and important tool for retaining their top executives. For publicly traded companies, pegging pay to performance can lead to a tax benefit: The
IRS limits deductions for executive compensation to $1 million for the company's top five executive officers -- unless the compensation is specifically classified as performance-related and shareholders approve those plans. So companies that want to deduct the bonuses from their taxes must define performance targets upon which they base the bonuses. Federal law allows boards to reset those targets from prior years for tax-deductible compensation without shareholder approval.

    Companies explain that tough times require flexibility. However, some critics of corporate pay practices question the moves. "No self-respecting CEO should accept a bonus when their company is laying off  workers due to failed performance or costing the shareholders money," says Ric Marshall, chief executive of the Corporate Library, an independent investment-research firm that focuses on corporate governance. "It's just that simple."

        At Sun Microsystems, Palo Alto, Calif., due to "economic challenges experienced during the last fiscal year, our earnings per share ... and revenues were significantly below plan," according to the company's
latest proxy. "As such, the Bonus Plan was amended to reduce the target bonus to 50% of the original plan and base the target bonus solely on third and fourth fiscal quarter performance criteria."

        Sun Chief Executive Scott G. McNealy received a $487,500 bonus for 2002, up from no bonus for  2001, but sharply less than his $4.8 million bonus for 2000. Originally, Mr. McNealy was eligible for a $2.5 million bonus for 2002, and even under the adjusted targets, he was still eligible for a $1.2 million bonus.

         Several other Sun Microsystems executives received no bonus for 2001, but received bonuses ranging from $82,400 to $241,800 for 2002. "The idea was to make it a little bit more attainable based on postbubble realities," says Sun spokeswoman Diane Carlini. The changes applied to bonuses for all 35,000 of the computer company's regular employees, she says. "Reducing the target bonus, just for the half a year so it only impacted the third and fourth fiscal quarter, made the range more realistic. This becomes a morale issue for all employees, I think."

      At AT&T Wireless, Redmond, Wash., such factors as a slowdown in the cellular-phone industry resulted in its original bonus performance targets "no longer providing meaningful incentives," according to its most recent proxy, so it reset the targets for the second half of the year. Company spokeswoman Adele Ambrose says that targets were changed after it became apparent that growth was slowing for the entire industry, but she adds that the carrier still pegged bonuses to the company maintaining its market share of the new, lowered estimates, which she said it achieved.

      "If you look at how we've been regarded during this period and now, you'd have to agree we are among the higher-performing companies and among the more modestly paid," said Ms. Ambrose, who added that roughly half of the company's employees were eligible for the bonuses, not just its executives.

      In some cases, companies in the travel and insurance industries made changes because of the impact of the Sept. 11, 2001, attacks. But some companies with less obvious ties to the fallout from Sept. 11 also blamed the attacks for missing targets. Cosmetics and skin-care company Estée Lauder, New York, cited the impact of Sept. 11 "and other events" on its sales at airports -- which account for 5% of its total revenue -- "and consumer sentiment generally" in explaining its decision to lower bonus targets, and authorized bonuses "in excess of those that would have been payable under application of the objective formulae of the Executive Annual Incentive Plan."

     A company spokeswoman said Estée Lauder made the move because several of the targets were set before Sept. 11, and that "the company remained profitable although not achieving its full plan." She added that the bonuses were less than half the original opportunity.

    The five executives listed in the company's proxy received 2002 bonuses totaling $4.4 million, with Fred H. Langhammer, the company's president and chief executive, receiving a $1.5 million bonus.

    At UST, a Greenwich, Conn., holding company that owns a maker of smokeless-tobacco products, a bonus plan for roughly 40% of its work force pegged to earnings couldn't be paid because of a $1.3 billion court judgment against the company. UST's board decided to establish a "contingent merit bonus fund" based on the company's "operating results" to award bonuses.

       "On an operational basis, it was a good year and the board felt that the executives responsible, some of whom weren't here during years that precipitated that lawsuit, should be compensated for what was, on an underlying basis, a good year," says a company spokesman.

  --Joann S. Lublin contributed to this article.

                   Write to Jesse Drucker at

                   Updated April 29, 2003