HP Mulled $70 Million, Two-Year Merger Deal for Fiorina

Compensation experts said the package, and a $48 million one proposed for Compaq CEO Michael Capellas, who would be the No. 2 executive in the merged firm, appeared excessive in the aftermath of the collapses of Enron and Global Crossing, and in light of a renewed emphasis on performance-based pay for top executives.

"To me it seems kind of bizarre, the magnitude of it," says Alan Johnson, managing director of New York-based Johnson Associates, a compensation consulting firm. "To be perfectly blunt about it, I don't think either of these executives are in huge demand at the moment."

Hewlett says HP was trying to "hide the ball" on compensation.

HP responded that there was no agreement or understanding between the company and the executives on the pay packages.

While not denying the content of the proposed pay packages, HP says the talks had been aborted and will not provide a floor for future negotiations, for which the board will consult compensation specialists.

"We agree that shareowners have every right to know compensation information, but we cannot disclose what has not been decided," HP says. "No new employment contracts exist."

Hewlett, who serves on the board's compensation committee, says he had tried to persuade HP to disclose the terms of the packages under consideration for the executives, who declined smaller merger retention bonuses in widely publicized acts of good faith.

HP says Hewlett is spreading "misinformation."

Hewlett charged HP management with using outside lawyers to pressure him into keeping the proposed compensation secret, but argued that it was vital information for investors considering the merger.

The proposed two-year package considered for Fiorina included an annual salary of $1.6 million, a target annual bonus of $4.8 million and 6 million stock options with a "total estimated current value" of $57 million, according to Hewlett.

By comparison, HP reported Fiorina received a $1 million salary and $13.5 million worth of stock options in 2001. She did not receive a bonus, due to HP's performance, although her 2000 bonus was $1.76 million.

The package considered for Capellas was an annual salary of $1 million, a target annual bonus of $3.8 million and 4 million stock options worth $38 million, Hewlett says.

"It seems, to me, incredibly rich," says Gary Kaplan, the founder of a Pasadena, Calif., executive search firm that bears his name, who said the deal would be better if tied to company performance. "In light of what's being exposed right now with the situations at Enron and Global Crossing ... I think there needs to be some sensitivity [to investor concerns and public perception about compensation."

Fiorina and other HP executives are expected to face questions on the merger when they meet with financial analysts Wednesday in New York for a delayed semiannual session.

One major shareholder, Brandes Investment Partners, raised the heat on her Tuesday, saying it would vote its shares--24.7 million, or 1.3 percent of HP as of the end of 2001--against the deal, citing Hewlett's strategy as an alternative.

A smaller former fence sitter, L. Roy Papp and Associates, which manages about 800,000 shares of HP, had finally decided to vote with management, since Compaq was cheap and its PC business could be spun off at a later date, executives say.

That addressed one of the key objections by Hewlett, who says HP would dilute the value of its printing business in exchange for a bloated PC business.

HP has focused on services and high-end computing, which it says are the key drivers of the deal and would put HP in the league of IBM, providing customers with one-stop technology shopping.

HP shareholders will vote on the merger on March 19, and Compaq shareholders are scheduled to vote on March 20.

Additional reporting by Ben Berkowitz and Kevin Krolicki in Los Angeles

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