September 22, 2013 5:25 pm

Nokia defends former chief Stephen Elop’s pay-off

Stephen Elop©Reuters

Microsoft has agreed to cover 70 per cent of Stephen Elop's pay-off with Nokia paying the remainder

Nokia is facing intense criticism over an €18.8m pay-off to its former chief executive. But the exact reasons for Stephen Elop receiving the money under the €5.44bn deal to sell the Finnish group’s mobile phone unit to Microsoft have been largely unexplored.

Mr Elop is getting the money under a change of control clause – a normal part of contracts for Nokia chief executives and many other business managers – which set out how much a manager is entitled to if another company buys all or a substantial part of Nokia.

The former Microsoft executive is set to receive €4.1m in salary and bonuses; €100,000 in benefits; and, at current values, €14.6m in stock awards that will vest earlier than scheduled.

However, questions remain, not least because Nokia says it amended Mr Elop’s contract as part of the deal to sell to Microsoft.

Why was the contract amended? Nokia says in the proxy materials for the November extraordinary shareholder meeting to approve the deal that under the amendment Mr Elop resigned as Nokia’s chief executive and became head of its devices and services business – what Nokia calls the mobile phone unit, which will be transferred to Microsoft.

Nowhere does it mention why the amendment was needed. On Sunday, the Finnish group told the Financial Times there were three reasons.

The first was to stop Mr Elop resigning. He could have resigned because of the change of control and still received the pay-off. “The amendment was made to keep him on board,” Nokia said.

Microsoft is keen to retain Mr Elop because the US group wants him to run the mobile phone unit, and he has been talked about as a favourite to replace Steve Ballmer as Microsoft chief executive. As part of the deal, Microsoft has agreed to cover 70 per cent of Mr Elop’s pay-off, with Nokia paying the remainder.

“They didn’t have to pay it legally. But they also want to ensure he comes and properly integrates the devices and services business,” Nokia said.

The second reason was that his original contract contained a non-compete agreement that included Microsoft among the list of companies that he could not join. That clause had to be altered to allow him to go to Microsoft with the unit when the deal closes, in the first quarter of next year.

The third reason, Nokia says, is to regulate what would happen were the deal to collapse. Nokia says the contract now says he could be reinstated as chief executive but he would give up all his equity awards.

What is unclear is why Nokia mentioned none of these reasons in its proxy filing. Instead, the filing states that Mr Elop would not have received the accelerated vesting of his stock awards – the majority of his pay-off – if Nokia terminated his contract before a change of control.

Nokia insists that the actual change of control is the same as when the contract was agreed by its board in 2010. “We didn’t touch the change of control,” it added.

That raises a second question, asked by many in Finland from politicians to Nokia workers: who inserted the clause in the first place?

Risto Siilasmaa, Nokia’s chairman and acting chief executive since Mr Elop’s demotion, said: “The compensation that will be paid to Stephen Elop after the [handsets] transaction closes is purely based on the terms and conditions of his CEO contract, approved by the board in 2010.”

Although Mr Siilasmaa was part of that board, in 2010 Nokia was chaired by Jorma Ollila, its long-time former chief executive. Nokia says simply that a similar change of control clause was in the contracts of Mr Elop’s predecessors and is common in global business. But it has certainly fuelled the impression in Finland that Mr Elop had an incentive to sell a big part of Nokia to his former – and future – employers.

A third question is, what happens now? Is there any chance of Mr Elop returning some or all of the money as some in Finland are privately speculating?

There seems little chance of that. Nokia appears exasperated by the furore over the pay award with a feeling that other chief executives in other countries have received more generous pay-offs.

More fundamentally, Nokia insists he is entitled to the money, both contractually and because of the company’s performance. Many of his stock awards were worth nothing, according to the annual reports of 2011 and 2012, because Nokia’s share price was so low. Since the deal was announced this month, the share price has risen two-thirds, lifting the value of his stock.

“His compensation is directly aligned to shareholder interests. It is a function of the stock price: the stock went up and so did the amount of his equity compensation,” Nokia says.

That may be as Nokia sees it. But as the intervention of Finland’s prime minister and finance minister showed over the weekend, there is anger in the country. The pressure may well continue building on both Mr Elop and Nokia.

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