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Under fire, Enron CEO passes up $60-million

Published Sep. 10, 2005

Attempting to quell a furious reaction from employees outraged that he stood to profit from a merger with Dynegy Inc., Kenneth Lay, chairman and chief executive of Enron Corp., decided late Tuesday to give up a severance package worth more than $60-million.

The tumult at Enron's headquarters in Houston began after the company disclosed in a securities filing early in the day that Lay was in line to collect $60.6-million in pay after the deal closed next year _ $20.2-million for every full calendar year left in his employment contract.

Lay had been a popular leader as Enron grew over the past 15 years from a pipeline operator into the nation's largest energy trader, a business largely of his invention. Employees shared in the gains, though none gained as much as Lay, who collected more than $300-million since 1989, mostly through exercising stock options.

But the value of employees' stock options and 401(k) accounts has evaporated this fall as Enron shares plummeted amid an accounting scandal. And traders and other workers started the day Tuesday gossiping angrily about Lay's severance package.

Then, at an afternoon meeting of employees in the company's core natural gas and electricity trading operation, which provides by far the biggest part of Enron's profits, "quite a bit of concern was raised about the news people had been seeing about this change of control payment," Enron spokesman Mark Palmer said.

Two senior executives who had attended the meeting, John Lavorato and Louise Kitchen, told Lay about the employees' reaction. "Ken made a decision shortly thereafter that the best thing to do would be to waive the payment altogether," Palmer said. Even if Dynegy's board of directors later vote to award Lay a new severance agreement, he will turn it down, Palmer added.

Severance pay had been an awkward matter for Lay during the past week. The only reason that Enron is being acquired, triggering the severance clauses in his employment contract, is the financial scandal that has occurred on his watch. The company's shares have lost almost 90 percent of their value since peaking in summer 2000.

During merger discussions last week, Lay told Dynegy chairman Charles Watson that he wanted to rework the severance package, Palmer said. Monday, Watson disclosed that Lay wanted much of the severance to be in the form of stock options.

By Tuesday afternoon, Enron officials were saying that Lay planned to take two-thirds of the severance in stock or other noncash compensation. And, they said, he wanted to give half of that amount, or one-third of his total package, to establish a new charitable foundation to benefit Enron employees. It was about an hour later that Enron said Lay would give up the severance entirely.

Lay has not decided whether to accept an invitation to be on the board of the combined company, which will be called Dynegy. The deal still could fall victim to antitrust objections or disclosures of further financial problems at Enron.

The stunning near-collapse of Enron _ bankruptcy was averted, many analysts say, only by the Dynegy acquisition _ closes a chapter on one of the most influential careers in the history of the energy business. The ugly circumstances of Enron's downfall, including the revelation that partnerships were used to move debt off the company's balance sheet and that Enron overstated profits during the past five years by almost $600-million, have left Lay's reputation in tatters.

Just months ago, Lay was widely hailed _ or decried, in some circles _ as the genius behind energy deregulation. His friend, George W. Bush, had been elected president, and policies favored by Enron were front and center in the administration's ballyhooed energy policy. Lay retired from day-to-day management, making plans to pursue new business interests. But he reassumed the chief executive's post at Enron in August, after the unexpected resignation of his handpicked successor, Jeffrey Skilling, and the accounting scandal swiftly unfolded in the weeks that followed.

Even without the severance package, Lay has become enormously wealthy running Enron.

All told, from 1989 through this year, Lay collected about $13-million in salary (his exact salary for this year is not known) and $26.8-million in cash bonuses. But those sums were dwarfed by the $266.7-million in profits he got from selling stock.

The bulk of his income from exercising options came in the past four years _ $13.1-million in 1998, $43.9-million in 1999, $123.4-million in 2000 and $20.7-million this year. This year he sold stock by prearrangement on every trading day through July 31, and then stopped, not wanting to appear to be selling as the stock price was declining. The options he has cashed in during recent years, as well as those he now owns, are badly out of the money at Enron's current stock price of $9.98, down from a peak reached in 2000 of $90.75.

His 2000 bonus was $7-million, an award Enron's board said was based on the company's rising profits and high shareholder return. The company restated those profits last week, saying it improperly applied accounting rules. It said that about 40 percent of its 2000 profits came from transactions with partnerships that were controlled by Andrew Fastow, who was then Enron's chief financial officer.

The company's stock price, which was in freefall amid questions about the Fastow partnerships that had prompted an investigation by the Securities and Exchange Commission, fell to $7 a share in the wake of the disclosures. That was the lowest price for the stock since 1991. It rebounded to nearly $10 after Dynegy agreed to acquire the company in a stock swap.

Still, Lay suffered huge paper losses this year. At the end of 2000, he had 5.1-million options that could have been exercised for profits of $257.5-million, and another 1.5-million options that would have been worth another $104.1-million when enough time had passed that they could be exercised _ assuming the share price stayed level. He exercised 565,928 of those options this year, making a profit of $20.7-million, but the ones he did not exercise are now underwater.