Verizon: Three Proposals on the 2007 Proxy. Research Department April 2007

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Alice Morton
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1 Verizon: Three Proposals on the 2007 Proxy Research Department April 2007

2 Three Proposals Could Establish a Better Link Between Executive Pay and Company Performance Total shareholder return has underperformed the industry peer group over 1 year, 3 years, 5 years Yet executive pay remains high Each proposal seeks to make compensation decisions more accountable to shareholders

3 CEO Pay at Verizon CEO pay salary, short-term and long-term incentive increased 25.18% on average over last five years 2006 over 2005: 9.45% 2005 over 2004: 48.66% 2004 over 2003: 1.75% 2003 over 2002: 34.97% 2002 over 2001: 31.05% Note: because of changes in SEC reporting requirements, comparisons between 2006 and previous years are approximate only Source: VZ Proxy Statements, various years (see following slide)

4 Ivan Seidenberg Pay in Detail Annual Compensation Long-Term Compensation Awards Salary Bonus(1) Other annual comp (2) RSUs/ PSUs number of stock options LTIP /SARs Payouts Change in Pension Value & Deferred Comp (3) All other comp (4) Total potential pay 2006 $2,100,000 $4,242,500 $13,076,500 0 $0 $1,097,300 $734,400 $21,260, $2,100,000 $4,147,500 $130,300 $11,340,100 0 $0 $1,707,100 $19,425, $1,557,700 $3,375,000 $114,000 $6,300, ,300 $0 $1,719,500 $13,066, $1,500,000 $2,775,000 $188,800 $4,200, ,200 $2,515,200 $1,662,100 $12,842, $1,500,000 $2,700,000 $147,500 $0 752,900 $2,289,700 $2,877,200 $9,514, $1,500,000 $2,437,500 $190,000 $0 784,900 $6,188,300 $3,132,400 $7,259,900 $10,257,700 $15,435,000 $770,600 $34,966,100 2,498,300 $15,245,700 $11,832,700 $83,368,300 (1) 2006 bonus data is the non-equity incentive plan compensation (2) Includes personal use of company aircraft, company vehicle and company apartment; financial planning allowances; personal travel and related tax reimbursement (3) Change in pension value and deferred compensation available only for 2006 (4) Includes contributions to savings plan; deferral plan; and life insurance bonus plan; for 2006 only also includes personal use of company aircraft, and vehicle; financial planning allowances; personal travel and related taxes

5 Total Shareholder Return (as of 12/31/2006) 5 Year 3 Year 1 Year Total Shareholder Return Compared Verizon Industry S&P TSR = change in share price + dividends paid Year 3 Year 1 Year Verizon Industry S&P 500 Source: Board Analyst, The Corporate Library

6 Three Proposals on This Year s Proxy Card Item #6 Advisory Vote on Executive Compensation Item #5 Compensation Consultant Disclosure Item #4 Shareholder Approval of Future Severance Agreements

7 Vote YES: Item #6 Advisory Voice on Executive Compensation Proposal calls for submission of the compensation of top executive officers to an annual advisory (non-binding) vote of shareholders Such votes give all shareholders a voice on pay Such votes also encourage meaningful conversations between Board and institutional shareholders Advisory votes Process used in U.K. since 2003 Other countries with shareholder votes on pay: Australia, Netherlands, Sweden

8 Voice on Pay Provides an Important Check on Compensation Committees "Shareholders expect compensation committees to establish appropriate measures that tie executive pay to company performance. Far too many compensation plans are fashioned in such a way that executives are rewarded regardless of long-term return on investment. An advisory vote gives shareholders the opportunity to let compensation committees know when they re not making the grade." Denise L. Nappier, Connecticut Treasurer, quoted in SocialFunds.com, 1/30/2007

9 Voice on Pay Could Provide Valuable Information I support the introduction of say on pay arrangements because they will annually provide companies with valuable information about how their shareholders view company performance. Lucian Bebchuk, William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Corporate Governance Program, Harvard Law School Testimony before Committee on Financial Services, U.S. House of Representatives, March 8, 2007

10 Investment Professionals Support Advisory Vote 76% of money managers and financial analysts favor giving investors a nonbinding vote on compensation packages CFA Institute poll, March 2007 (as reported in Wall Street Journal, April 4, 2007) TIAA-CREF will generally support shareholder resolutions seeking an advisory vote on companies compensation disclosure (TIAA-CREF Policy Statement on Corporate Governance, March 2007, p. 35) T. Rowe Price Group and Walden Asset Management also support advisory vote

11 Additional Support for Voice on Pay AFLAC, Inc. voluntarily adopts shareholder advisory on executive pay (to begin in 2009) The Seattle Post-Intelligencer editorial: Investors Have No Say Over Exec Pay (3/25/2007) The Economist editorial: A Penny for Your Thoughts; Executive Pay (3/24/2007) Atlanta Journal-Constitution editorial: Time to Let Shareholders Speak (3?14/2007) Financial Times editorial: A Vote on Pay; US Investors Deserve the Same Rights as British Ones (2/20/2007)

12 Vote Yes: Item #5 Compensation Consultant Transparency Proposal urges Verizon to disclose to shareholders whether any senior executives participated in the previous five years in the selection or retention of the compensation committee consultant and whether those consultants advised the company on other matters The goal is to eliminate conflicts of interest that could influence recommendations for executive compensation New York Times article questioned the independence of Verizon s consultant in view of the high pay for CEO (4/10/2006)

13 Compensation Consultants should be Independent In no circumstances should the committee utilize a consultant for director compensation or executive compensation who is also retained by management. CII, Compensation Committee Responsibilities CEO perks at one company are quickly copied elsewhere. All the other kids have one may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees. Warren Buffett 2007 Letter to Shareholders

14 Verizon Made Some Changes But Did Not Go Far Enough August 2006, Human Resources Committee of the Board replaced Hewitt Associates as its Consultant Hewitt served as compensation consultant since 2000 Hewitt also provided employee benefits, administration, and actuarial services to Verizon Hewitt received more than $500 million from Verizon and predecessor companies from (New York Times, 4/10/07) Hewitt replaced by Pearl Meyer which provides no other services to Company Statement of opposition in the Proxy reveals that no senior executive participated in the selection or retention of new consultant

15 HOWEVER, Verizon Has No Policy to Protect Compensation Committee Independence Verizon has no policy that would require disclosure of any fees that might be paid to Pearl Meyer or future consultants for other services There is no policy in place to prevent management from replacing Consultant Verizon has not detailed the fees paid Hewitt for other services

16 Other Companies Have Policies to Protect Compensation Consultant Independence Pfizer specifies the criteria for the compensation consultant stressing financial independence and critical thinking Also, Pfizer (beginning in its 2006 proxy) details fees paid to compensation consultant Morgan Stanley: Compensation committee retained new independent compensation consultant for fiscal 2007 and stated, Going forward, any engagement by the Company of the Committee s consultant must be approved by the Committee and the Committee must pre-approve any engagement of the consultant by the Company for services with fees to exceed $25,000. Time Warner details fees paid to compensation consultant for advice to Board for 2005 and 2006 as well as fees paid for other services provided to company Source: 2007 Proxy Statements, Pfizer, Morgan Stanley, Time Warner

17 Vote Yes: Item #4 Shareholder Approval of Severance Pay Proposal urges the Board to seek shareholder approval of future severance agreements in excess of 2.99 times base salary and bonus Severance agreement is defined to include any employment, retirement, settlement, change-in-control agreements or changes modifying them Benefit is defined to include retirement payments, equity awards, and tax reimbursements

18 Verizon Severance Policy Insufficient In 2003, a similar proposal covering retirement and lump sum cash payments at Verizon received 59% of votes cast for and against In 2004 Company adopted policy that it would not enter into new severance agreements providing for lump-sum cash severance payment exceeding 2.99 times salary and bonus without shareholder approval BUT policy does not include retirement benefits, equity awards, or tax reimbursement

19 If Board Terminated Ivan Seidenberg s Employment in 2007 Without Cause Mr. Seidenberg could receive over 5 times the amount permitted by Item #4 Proposal $6,279,000 = Severance permitted by proposal (2006 salary + bonus = $2,100,000 x 2.99) $32,355,032 = Amount of benefits Mr. Seidenberg would receive (see next slide) Estimated benefits do not include $14,199,059 Company Contribution to Deferred Compensation Account (not including $32.75 million of his own contributions) over 40 years 4,623,495 Number of unexercised options that expire between 2007 and 2014??? Value of equity incentive awards that have not vested (see p. 40 of 2007 Proxy)

20 Ivan Seidenberg s Potential Departure Benefits Short Term Incentive Long Term Incentive (2005 PSU) Long Term Incentive (2006 PSU) Executive Life Insurance Financial Planning Aircraft Usage Tax Gross-Up on Perquisites Present Value of Pension Benefit Total $2,625,000 $9,121,775 $13,086,906 $2,354,865 $10,000 $593,530 $1,899,634 $2,663,322 $32,355,032

21 Everybody should have an interest in controlling this explosion in executive pay. The wealth of America has been built through the returns of our public corporations, and if those returns are being redirected to company managements, then the people who get the short end of the stick are the people who hope to retire someday.» Frederick E. Rowe, Jr., Chairman of the Texas Pension Review Board

22 Vote YES Item #6 Advisory Vote on Executive Compensation Item #5 Compensation Consultant Disclosure Item #4 Shareholder Approval of Future Severance Agreements

Just Say No to Pay for Failure at Verizon Communications

Just Say No to Pay for Failure at Verizon Communications AFL-CIO Office of Investment Association of BellTel Retirees Communications Workers of America Research Dept. April 2007 The Test In judging whether