Constellation Energy Group, which narrowly avoided bankruptcy last year, negotiated a deal with France's largest utility ensuring senior managers would receive up to $32 million in long-term performance and retention incentives during the next two years.
The move comes as the Baltimore company, which agreed to sell half of its nuclear power business to Electricite de France for $4.5 billion, has laid off hundreds of workers, slashed its stockholder dividend and is seeking rate increases for its BGE customers.
If the deal closes, EDF has agreed to pay the difference between awards the managers earn based on meeting company performance goals and the long-term incentives for which they're eligible. About 135 senior managers would have received those full payments immediately had the original deal with billionaire Warren Buffett gone through. In December, Constellation terminated its sale to Buffett's MidAmerican Energy Holdings Co. in favor of EDF's bid.
"I can't tell you the number of people who have called me, having trouble with their utility bills," said state Sen. George Della Jr., a Baltimore Democrat. "It's sad to think that we had a great utility here in the state of Maryland, and to reward someone for bringing the company to the brink of bankruptcy and then giving them a ... bonus, that's beyond reason to me."
Constellation's board members decided that about 120 senior managers across the company's units would receive the payouts that they would have gotten under the MidAmerican deal, said spokesman Rob Gould. He insisted that the payouts are not bonuses because they represent long-term performance and not the past year's results.
But the board has not made a similar commitment to guarantee the full incentives to the company's dozen or so executive officers, including Chairman and Chief Executive Officer Mayo A. Shattuck III.
"Their long-term payout will be based solely on company performance and the board's discretion," Gould said.
He said the company saw a need to "retain key Constellation Energy senior managers" as it entered into a nuclear venture with EDF.
"To address this concern, Constellation Energy negotiated a compensation framework for critical senior managers that would ensure their long-term compensation potential under an EDF joint venture would be no less than it might have been under a MidAmerican merger," Gould said last night.
Had the MidAmerican merger closed, Shattuck would have received $10.9 million in incentives, according to proxy documents filed with the Securities and Exchange Commission.
Under the purchase agreement between Constellation and EDF, the French utility has agreed to pay up to $19 million in performance awards covering 2007-2009 and up to $13 million for 2008-2010.
The 120 senior managers would be eligible for $7.8 million and $5.7 million for those respective periods, Gould said. None of the employees in the commodities-trading unit are included; that division was the source of the company's cash problems.
Actual payouts, however, would not be paid until next February and February 2011 and would be based on performance, Gould said.
An employee must be working for Constellation at the end of the performance period to be eligible for any payout. That means, if any employee leaves before that time, they receive nothing, Gould said.
"The question is, should they get any kind of reward?" said Jeff Hooke, a Bethesda-based investment consultant and chairman of the Maryland Tax Education Foundation, which doesn't believe the EDF deal serves the public interest. "The real question is, should they even have their jobs right now?"
Last month, Shattuck announced that he would forgo his 2008 bonus because of the company's financial troubles. At the same time, Constellation announced that its Baltimore Gas and Electric Co. division plans to seek a rate increase for delivering electricity and natural gas next year to 1.2 million customers.
Constellation is trying to recover from a dismal stretch during the past year.
Its stock, which closed yesterday at $18.86 a share, is down 27 percent this year after falling 75 percent in 2008. Constellation cut its dividend in half after losing $1.4 billion during the fourth quarter of 2008. And the company laid off more than 800 employees in response to the deepening recession and slumping markets.
In September, MidAmerican agreed to buy Constellation for $4.7 billion, or $26.50 a share, as the company was on the brink of bankruptcy.
But Constellation scrapped that deal in December to partner with EDF. The move enables Constellation to remain an independent company.
It is common for senior executives to receive severance, accelerated payments of awards and other related payouts when a so-called change in control occurs, such as a sale.
The practice is used so that executives would act in the best interest of shareholders even if their jobs may be on the line. But it is also controversial, said Charles Elson, a professor and director of the Weinberg Center for Corporate Governance at the University of Delaware.
Constellation executives insist the transaction does not result in a change of control, even though EDF is making payments as if it did, as Elson and another corporate governance expert pointed out yesterday.
"There needs to be a double trigger for change in control [payments]; not only change in control but the executives also lose their jobs," said Shirley Westcott, managing director of policy at PROXY Governance, which last year cited Constellation's "out of line" executive pay. "This is sort of a situation where they're getting a payout even though they didn't lose their jobs. That's a little suspect. That makes it harder to justify those payments."
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