BUSINESSWEEK ONLINE : APRIL 17, 2000 ISSUE
SPECIAL REPORT

The Package That Launched a Dozen Lawsuits


As the longtime managing director of Three Cities Research Inc., a very private New York investment firm, Willem F.P. de Vogel managed to keep a tastefully low profile until he got tangled up in history's largest single-year pay package. As the head of Computer Associates International Inc.'s (CA) compensation committee, de Vogel was the lead architect of a stock-grant plan that awarded over $1 billion in stock to just three executives. Some $655 million of it went to Chairman and CEO Charles B. Wang, ranking him first on BUSINESS WEEK's list of highest-paid execs for 1999.

The award prompted a dozen lawsuits and a barrage of criticism. Graef S. Crystal, the prominent executive-pay gadfly, lambasted the award as ''unconscionable'' and described Wang as ''easily the most overpaid CEO in the history of the U.S.'' During an interview in January, de Vogel looked as if he had taken a punch to the gut as he discussed the grant controversy. ''People say we gave away $1 billion,'' he exclaimed. ''Give me a break!''

SURPRISE. To qualify for the shares under a plan approved by CA shareholders in 1995, top managers were given five years to lift the stock price from $20 to $53.33. They did it in three, to de Vogel's surprise. In mid-1998, CA awarded 12.2 million shares to Wang, 6.1 million to Sanjay Kumar, president and chief operating officer, and 2 million shares to Russell M. Artzt, an executive vice-president. Each had to pay income tax immediately but could not sell any shares, or even borrow against them, for ten years.

To cover the cost of the grant, CA took a staggering $675 million charge against earnings. After the write-off, CA's stock dropped into the 20s but has rebounded strongly of late, to the $55 range.

By all accounts, the original impetus behind the grant was to bind Kumar, a budding star at 32, to CA long term. But why then did the lion's share of the award end up with Wang, who already owned about 5% of CA? New York Stock Exchange Chairman Richard Grasso, one of three members of CA's comp committee, says that the board feared that Wang, 55, might leave to start a new company. ''Charles was more concerned about Sanjay than about himself, but I don't want to lose either one of them,'' Grasso says.

FLAWED. But the prevailing view among outside observers is that Wang identifies so fiercely with CA that outside observers think it inconceivable that he would ever voluntarily quit, stock grant or no. ''I see a zero probability of that,'' says Charles E. Phillips, a Morgan Stanley Dean Witter analyst.

If CA's plan was flawed in concept, it also was marred by faulty execution. Last November, Delaware Chancery Court Judge Myron T. Steele decided two shareholder suits by ruling that Wang, Kumar, and Artzt had to give back 9.5 million of the 20.3 million shares granted them. The judge found that CA's stock plan lacked the usual language authorizing an increase in the shares awarded if the stock were split. CA appealed.

On Mar. 31, CA announced a settlement in the Delaware cases. Wang, Kumar, and Artzt agreed to return 4.5 million of 9.5 million disputed shares. The settlement still must be approved by Judge Steele. Whatever the outcome of the litigation, it appears likely that controversy will continue to dog de Vogel and his comp committee. A few months ago, Wang said he was not worried about losing in Delaware. ''I know my directors, my comp committee,'' he said. ''They'll make me whole.'' If only they cared as much about the shareholders.

By Anthony Bianco in New York

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