Pentagon's funding of Lockheed Martin merger bonuses under investigation


WASHINGTON -- The Pentagon's inspector general is investigating the "reasonableness" of Lockheed Martin Corp. using $31 million in taxpayer money to help fund $92 million in bonuses top executives gave themselves in a merger that created the nation's largest defense contractor.

As part of the probe by Eleanor Hill, the new Defense Department inspector general, Pentagon auditors will inspect Lockheed Martin books next month.

"The audit by the Defense Contract Audit Agency will determine if the amounts claimed by the Lockheed Martin Corp. are allowable," Ms. Hill said in a preliminary report. She noted that federal procurement regulations prohibit defense contractors from using tax dollars for "golden parachutes" and other excessive self-dealing.

Ms. Hill also raised the possibility that a congressional cap on compensation for executives of defense contractors could reduce the Pentagon's share of the bonus package. If the Pentagon payment is cut, Bethesda-based Lockheed Martin could be forced to dip deeper into profits, a move sure to anger stockholders who already have complained that the $92 million in bonuses was excessive and unwarranted.

A spokesman for Lockheed Martin, Chip Manor, said the contractor has submitted documents to auditors that he said "will show the payments were both allowable and reasonable, which are the standards for Pentagon reimbursements."

The company holds defense contracts for construction of F-16 aircraft and the Trident missile system, among many other projects.

The Clinton administration approved Pentagon payment of the $31 million after secret negotiations between then-Deputy Defense Secretary John Deutch and officials of Martin Marietta Corp. and Lockheed in December. When the payment was revealed in March, the White House was swamped with protests rTC from voters and unions representing some of the 19,000 workers who will lose their jobs over the next five years as a result of the merger.

Defense Secretary William J. Perry has defended the $31 million payment, saying that the merger will reduce Pentagon payments in overhead costs. And Mr. Perry said that Lockheed and Martin Marietta would have gotten the $31 million even if there had been no merger.

But Mr. Manor acknowledged that the merger resulted in major changes in the incentive package for the executives. According to Mr. Manor, the merger "accelerated" bonus payments to executives. This restructuring of the bonus package, a record for the defense industry, was approved by Mr. Perry and Mr. Deutch, who is now director of the Central Intelligence Agency.

According to Mr. Manor, most of the $92 million already was to be paid to Norman Augustine -- the Martin Marietta architect of the merger -- and more than 200 other corporation executives.

Both Mr. Perry and Mr. Deutch are former employees of Mr. Augustine, who was to receive an $8.2 million bonus as a result of the merger.

In addition to using Pentagon funds to cover one-third of the $92 million bonus package, Lockheed Martin -- whose operations include a Middle River plant with about 1,000 employees -- is also asking the Pentagon to pay most of the $1.7 billion in costs associated with the merger. Such payments were prohibited until 1993, when Mr. Perry and Mr. Deutch reversed Pentagon reimbursement policies at the request of Mr. Augustine, according to Pentagon records.

Ms. Hill's investigation has focused both on the Pentagon's $31 million share of the bonus package and on the $1.7 billion subsidy of merger costs. She launched the probe as a result of demands by congressional critics of the payments, Sen. Charles E. Grassley, R-Iowa, and Sen. Barbara Boxer, D-Calif.

In her preliminary report, Ms. Hill said a congressional cap on defense salaries imposed last year could limit the $31 million Pentagon payment.

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