WorldCom Inc.'s incoming chief executive, Michael D. Capellas, ran into unexpected resistance yesterday when a federal judge sharply criticized his proposed pay package, saying it is so generous that it raises questions about the scandal-plagued company's commitment to ethical reform.
In a three-page memorandum, Judge Jed S. Rakoff, who is overseeing the Securities and Exchange Commission's $9 billion fraud case against WorldCom, wrote that court-appointed corporate monitor Richard C. Breeden had already rejected several elements of the package as "grossly excessive."
Under the current plan, Capellas would be paid $1.5 million in salary, plus a signing bonus of $2 million. He also would be guaranteed an additional bonus of $1.5 million next year. Once the company emerges from bankruptcy, Capellas would be awarded stock worth $18 million.
Rakoff called the plan "so potentially problematic" that it "raises serious concerns as to whether proposed new management is as committed to reform as the nature of this case requires." He ordered the company to begin immediate negotiations with Breeden to resolve "what appears to be his very serious objections to the proposed compensation package."
WorldCom expressed surprise at the missive, saying Breeden had never informed the company of his concerns. WorldCom General Counsel Michael H. Salsbury wrote Rakoff yesterday that despite daily contact with one of Breeden's assistants, "on no occasion did he state or suggest that Mr. Breeden believed the proposed package was excessive." When he asked the assistant if Breeden was going to respond to the proposal, Salsbury wrote, the assistant stated there is "no reason you should not keep to your plan."
Until yesterday, the company and its creditors considered approval of Capellas's compensation to be largely a formality. Rakoff told the company to be prepared to address questions about the pay package at a Dec. 16 hearing he would jointly hold with U.S. Bankruptcy Judge Arthur J. Gonzalez, who is overseeing WorldCom's bankruptcy case.
WorldCom has defended the pay package in court filings, saying it is on par or slightly below average for executives heading companies of similar size. But Paul Hodgson, a senior research associate at the Corporate Library, a public interest group that is generally critical of packages that include guaranteed bonuses, praised Breeden's efforts to put a ceiling on Capellas's compensation: "I wish it happened more often."
Rakoff's strongly worded rebuke also stung the company's creditors, who have supported the compensation terms and who have never felt comfortable with Breeden's aggressive approach to his job as a corporate monitor. "Breeden is screwing around with our money," said one source familiar with the negotiations.
At least some of the company's bondholders believe Breeden may be doing more harm than good by dragging out the negotiations over the compensation package for Capellas, the former chief executive of Compaq Computer Corp.
"Let's get Capellas up and running," the creditor said. "The company does not need uncertainty now."
Calls to Breeden's office yesterday were not returned. Capellas and Breeden are now expected to meet sometime before the Dec. 16 hearing.
Rakoff's criticism of the compensation plan comes just two weeks after he approved a partial settlement that largely resolves the SEC's fraud charges against the nation's second-largest long-distance carrier. Under the settlement, WorldCom agreed to continued oversight by Breeden in addition to taking other corrective actions. The government left open the possibility that it may still levy fines against the company.