STATEMENT OF DR. CHARLES A. LeMAISTRE
Before the Permanent
Subcommittee on Investigations
Committee on Governmental
Affairs
United States Senate
May 7, 2002
Chairman Levin, Senator Collins, and Members of the
Subcommittee. Good afternoon, and thank
you for the opportunity to address the Subcommittee.
My name is Charles LeMaistre. I am a physician by profession. I am also the President Emeritus of the
University of Texas M.D. Anderson Cancer Center, and former Chancellor of the
University of Texas System. For 17
years, I served on Enron’s Board. For
most of those years, I held the position of Chairman of the Compensation and
Management Development Committee. I
resigned in March 2002 as part of the restructuring of the Board.
I would like to address some of the questions that
have been raised regarding the compensation and bonus process for Enron
executives.
The Compensation Committee’s basic responsibility was
to assure that the senior executives of the Company were compensated
effectively in a manner consistent with the compensation strategy stated to the
shareholders. The committee considered
internal equity, competitive compensation practices, and the requirements of
appropriate regulatory bodies. The philosophy behind executive compensation is
to reward executive performance that creates long-term shareholder value; in
essence a “pay-for-performance” philosophy.
Enron executives had the opportunity to earn at the 75th
percentile or higher of the compensation rates at comparable competitive
companies, subject to obtaining performance at the 75th percentile
or higher at Enron.
As a first step, we received detailed recommendations
from management and discussed the justifications fully. We also relied, frequently, on an outside
executive compensation firm, Towers Perrin, to provide advice and
recommendations regarding the various compensation issues that were brought to
the Committee. Based on that advice,
the Committee arrived at its proposals for presentation to the Board.
In recent years, the Compensation Committee was
dealing with Enron’s evolution from a pipeline company to an energy trading
company that engaged in sophisticated and complex financing structures. Enron sought out different talent for its
senior management in the energy trading business. To hire and successfully retain these highly sought individuals,
Enron needed to offer compensation packages equivalent to, or better than,
those offered by the competition. Enron
believed that the talented individuals leading the Company were one of its most
valuable assets, and critical to its success.
Towers Perrin was often asked to craft compensation packages, stress
test the executive compensation plan, and conduct surveys of competitive
practices to be sure Enron was well-positioned in the marketplace.
The media and others have raised many questions about
Mr. Lay’s compensation. In particular,
I would like to address the $141 million he received in total compensation for
the year 2000. It has been suggested
that this level of compensation was unreasonably high and over 10 times the
average received by the CEOs of top two hundred companies.
First, I believe that comparing Mr. Lay’s total
compensation against the average salary for a CEO in a top 200 company does not
necessarily yield an accurate picture.
Because Mr. Lay’s compensation placed him in the top 10 highest paid
CEOs, I believe that comparing his compensation to those in that category is
more accurate. Within the top 10, Mr.
Lay was ranked seventh. That year,
Enron coincidentally was ranked as the seventh largest company. The average compensation for the top 10 CEOs
was about $169 million. The top
compensation was $293 million. I have
attached a chart to my statement that presents this information.
Second, I think it is important to break out what
comprises Mr. Lay’s total compensation package to determine the actual cost to
the Company for that year. A very large
portion of the total compensation is at risk under the pay-for-performance
philosophy. The portion at risk depends
upon meeting competitive criteria for the future value realized from stock
options exercised and from restricted stock payouts to be realized. For this portion, the executive is rewarded
only if the shareholder is rewarded. If
the “at risk” portion is subtracted from the total, you arrive at about $10
million, which I believe is a more accurate representation of Mr. Lay’s 2000
compensation cost the company that year.
That roughly $10 million includes a base salary of about $1.3 million
and a bonus of $7 million. I also note
that 2000 was an extraordinary year for Enron and its shareholders, which
accounts for the large increase in his bonus from the previous year. Mr. Lay’s compensation was disclosed and
footnoted in detail in the Proxy Statement each year.
On October 19, 2001 the Wall Street Journal reported
that Mr. Fastow, and possibly some of his partnership associates, received more
than $7 million in compensation from the LJM partnerships. Let me comment on what I know about his LJM
compensation.
On October 19, 2001, a special meeting of the full
Board was called to discuss Mr. Fastow’s compensation from the LJM and other
related matters. On October 22, 2001,
the Board authorized Mr. Duncan and me to inquire directly of Mr. Fastow as to
his compensation from the LJM partnerships.
Enron’s General Counsel drafted the questions that we would ask. I called Mr. Fastow on October 22 and
arranged for a conference call the next day.
On that call, Mr. Duncan and I asked Mr. Fastow about the amount of his
investments in LJM1 and LJM2 and the return on those investments. Mr. Fastow responded that his commitments in
LJM1 and LJM2 were $1 million and $3.9 million respectively. He stated that his income from LJM1 was $23
million, and approximately $22 million from LJM2. On October 24, 2001, Mr. Fastow was relieved of his
responsibility as Chief Financial Officer.
I do not believe that the Board of Directors would
ever have approved Mr. Fastow’s participation in the partnerships if we had
known he would be generating such compensation. If management had instituted
the controls the Board installed, Mr. Fastow’s compensation would have been reported
to Mr. Skilling, the Audit Committee, Finance Committee, and the Compensation
Committee. The October 6, 2000 Finance
Committee meeting minutes clearly show, from his own presentation, that Mr.
Fastow was aware of the six controls imposed by the Board on his participation
in LJM, including his responsibility to review with Mr. Skilling “his economic
interests in the Company and the LJM funds.”
Following Mr. Fastow’s presentation, the Finance Committee added to the
existing six controls a quarterly review of the LJM transactions and a review
by the Compensation Committee of Mr. Fastow’s LJM compensation.
Prior to 1999, Enron granted performance units to
corporate and certain operating company executives who were not in an Enron
long-term incentive plan. These
operating company executives were, for the most part, in commercial support and
pipeline businesses. The first
performance units were awarded in 1987 and the last in 1998. Awards were based on Enron’s total shareholder
return over four years. The
participants were nominated by the Office of the Chairman and approved by the
Compensation Committee. There was a
limit of 3 million performance units per individual. Performance was measured against that of a performance peer group
of companies with a payout scale of 1 to 7.
Each unit was assigned a valuation of $1.00. A ranking of 1 gained a payout of $2 per performance unit
(“p.u.”). A ranking of 7 gained a
payout of $ 0.00/p.u..
In the event that the total shareholder return did not
exceed the cumulative percentage for the 90-day Treasury Bill, a performance
unit would have no value.
I believe that our Committee and the Enron Board
endeavored to manage carefully and effectively Enron’s executive compensation
while this company was rapidly evolving, growing, and undertaking new business
opportunities. The Compensation
Committee sought and relied on the advice of outside executive compensation
experts to ensure that our recommendations and decisions were consistent with
the marketplace. Although the Board was
willing to award compensation that was competitive and deserved, it certainly
did not approve and was not made aware by management that some individuals reaped
huge profits at the Company’s expense, or that others abused certain benefits
in ways for which they were not designed.
Thank you for your attention.
I will be pleased to answer questions from the
Subcommittee.