Nortel US moves to seize $37.9m in deferred compensation

The following story was published on Dec 23rd on the Dow Jones Bankruptcy Review.

As explained to me the program referred to was available to most everybody in the U.S. at JCI 6 (director-level) or higher. Some JCI 5’s were eligible too. The vast majority of participants in this plan were at the director and VP level, not the CxOs or LOB presidents.


Nortel moves to seize $37.9m in executive retirement savings

By Peg Brickley, Dow Jones Daily Bankruptcy Review

Thursday 23 December 2010

Canadian firm says money is part of a 'risky' deferred-compensation plan.

Nortel Networks Corp. moved Wednesday to seize $37.9 million in retirement savings socked away over 10 years by some of its U.S. managers and executives.

The Canadian telecommunications-equipment maker says the money is in a deferred-compensation plan that participants understood was a "risky undertaking," because terms allow Nortel to take the retirement savings if it ran into trouble.

The filing with the U.S. Bankruptcy Court in Wilmington, Del., is couched as a stipulation with the bank that holds the deferred pay and bonuses in a trust account. Once a judge signs off on the settlement, Nortel's papers say, the money executives put away in the trust becomes company property. Nortel named no names in Wednesday's court filing but said the money was put away by "a select group of management and highly compensated employees" in the U.S.

According to the company, the deferred-compensation plan it created in 2000 is a "rabbi trust," which falls outside the protection of U.S. pension laws. Executives were offered an opportunity to delay taking up to 80% of their base salary, and up to 95% of commissions and bonuses, by putting the money in the trust.

The expectation was that they would draw on their earnings after retirement, when tax rates were lower. Nortel says the deal included an understanding that in the event of bankruptcy, the participating executives would get in line with other unsecured creditors to await payment under a Chapter 11 plan.

The fate of deferred-compensation programs in Chapter 11 often depends on how the programs were actually administered. Because they expose earned employee pay to creditors, such programs are supposed to be limited to top executives who presumably have access to professional advice about the risk of participating.

Not all companies might play by the rules, though.