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Telecom companies go dot-com with incentives

Consolidation and new executive leadership have spawned efforts to foster updated cultures in the communications industry.

The Baby Bell local phone companies have long professed a desire to be associated with the freewheeling Internet. Now they are backing up those ambitions.

Two major local phone companies, the re-crafted Qwest Communications International and Verizon Communications, recently announced broad new plans to offer stock options and employee stock purchase plans as an incentive to create a more entrepreneurial workplace.

Telecommunications executives have long received stock options as an incentive, but across-the-board employee stock option and stock purchase plans have been more rare--until now--at the local phone companies, particularly among the union ranks, where typically salaries and benefits are collectively bargained for by labor union representatives.

Long managed as regulated monopolies, the local phone giants have been criticized for bloated payrolls, poor service and slow reaction times to industry and market changes. But increased competition from both upstart communications carriers and new Internet services is threatening the Baby Bells.

Consolidation and new executive leadership have spawned efforts to foster updated cultures in the communications industry, one in which creativity, productivity and innovation pays. But some industry experts say the monolithic management style and slow-moving culture of the Baby Bells are too entrenched, and that granting employees a few shares in the company will do little to motivate massive work forces.

"I don't think it's a silver bullet," said Lisa Pierce, director of telecommunications research at Giga Information Group, a market research firm. "Giving people several hundred shares doesn't necessarily change the behavior."

Compensation analysts said that companies hoping to cultivate a more entrepreneurial culture must commit to broader changes in management, new training programs and other employee education plans--not to simply doling out a few stock options.

"Options in and of themselves don't change anything. Changing a corporate culture is a long-term event," said Brent Longnecker, a compensation analyst and executive vice president at Resources Connection, a professional services firm.

Bells pay for performance
When Qwest last week announced a major restructuring plan for integrating US West, executives unveiled new incentive programs in an effort to link compensation with employees' performance. Qwest has granted 200 stock options to all nonunion workers and installed a discounted employee stock purchase plan for all workers.

Qwest chief executive Joseph Nacchio championed an "entrepreneurial culture" for his newly acquired company.

Similarly, Verizon--formerly Bell Atlantic and GTE--announced a new stock option grant program giving all 260,000 of the company's employees a see story: Verizon who? so-called founders grant in commemoration of the newly combined company. Most rank-and-file employees will receive between 100 and 700 options, which are priced around $43 apiece and will vest after three years. The options are a one-time grant and may not be granted again to other employees in the future.

"It's intended to mark the start of the company and to get the employees to think and act as a team," said Verizon spokeswoman Sharon Cohen-Hagar. "You want to send a signal to employees about the corporate culture. We're inviting them to have a stake in the company's growth."

Qwest's Nacchio has made no secret of his desire to change the culture at US West. He often tussled with US West chief Sol Trujillo and recently announced plans to lay off 11,000 workers. Nacchio hopes his new incentive plans will encourage workers to reverse US West's perception as a company with poor service.

For its part, Verizon is using its stock option grants somewhat differently--as a way to "celebrate" the formation of the new company and to help keep its employees in a tight labor market. "Retention is one of the issues," Cohen-Hagar said.

Despite the differing reasons for granting stock options, the moves by Qwest and Verizon seem to indicate a newfound willingness by traditional telecommunications companies to adopt creative new ways to inspire employees and encourage growth, according to analysts.

Challenges to changing perceptions
Using stock as compensation is a practice employed by many Internet start-ups and Silicon Valley technology firms. The theory is that by giving workers an ownership stake in the future of the company, productivity will increase and employees will harbor a passion to succeed.

GTE has offered stock options since 1996, about the time most first-generation Internet companies were going public, but the move marks a first for Bell Atlantic, according to Cohen-Hagar.

Qwest CEO changes the rules "It remains to be seen whether it will change perceptions," she said.

Compensation and workplace experts say the Baby Bells' efforts are a good first step, but they need to be accompanied by a broader effort to change management practices, such as adopting new training plans for employees and other programs.

"You don't get a start-up mentality by giving 100 or 200 options to tens of thousands of employees," said David Levine, an associate professor at the University of California at Berkeley Haas School of Business. "You don't change your pay plan a little bit and get a massive change. But when you put the whole package together, you can create a lot more customer focus and more innovation."

Analysts expect the local phone companies and other traditional communications providers to continue to find new and creative ways to grow faster and motivate employees to work harder. For example, many communications companies have spun off wireless and data and Internet divisions as smaller public companies in hopes of engendering a more energetic, start-up-like environment.

"I think you see them trying to become more entrepreneurial in that the newer, higher growth segments are not in the regulated, unionized arms of these companies," Pierce said.

Labor unions previously maintained an ambivalent attitude toward stock ownership, according to Levine, but that is changing. For example, many steelworker unions began embracing stock ownership as many as 20 years ago.

In spite of their potential as an incentive, experts say that by beginning to offer new stock plans, communications companies may open themselves to challenges anew.

see related story: Employees may demand cash vs. stocks "To the extent that you grant options it can be harder to motivate employees when the shares go down drastically," said Longnecker. Employees may begin to lose hope, he added, when the share price falls below the price at which they can excercise their options--known as being "under water."

Indeed, the stock market downturn earlier this year created a bit of a backlash in the Internet market, whereby many job candidates began demanding higher salaries and fewer stock options as a result.

Despite the challenges facing the Baby Bell local phone companies in altering their ways, industry experts say their new stock plans--although not a quick fix--underscore their volition to try to change.