Proxy Statement
Compensation Discussion and Analysis

Executive Summary

Summary of Key 2010 Compensation Decisions

The Committee took Verizon’s accomplishments in 2010 into account in making the following key compensation decisions:

  • 2010 Base Salary and Target Incentive Opportunities. During 2010, the Committee reviewed competitive market pay practices to determine whether base salary increases and increases in target short-term and long-term incentives were advisable, particularly in light of several key promotions within the management team during the last quarter of 2010. After considering this information and the roles and responsibilities for each executive following promotion, the Committee determined to increase the base salaries for Messrs. McAdam, Mead and Shammo in recognition of their new roles. Our other named executive officers, including Mr. Seidenberg, did not receive a salary increase in 2010. Mr. McAdam’s target short-term and long-term incentive award values were also increased in connection with his new role. The target short-term and long-term incentive award values for our other named executive officers (expressed as a percentage of each of their respective base salary levels) did not increase.
  • 2010 Short-Term Incentive Awards. Based on the Company’s performance against the measures the Committee established at the beginning of the year, the 2010 short-term incentive awards were paid at 100% of their targeted level for all of the named executive officers, including Mr. Seidenberg. This payout reflected Verizon’s achievement of the measures relative to the target levels of performance.
  • 2008-2010 Long-Term Incentives Earned. Based on the Company’s performance against the measures the Committee established at the beginning of the 2008-2010 performance cycle, Verizon’s executives, including the named executive officers, each vested in 100% of the number of performance stock units (referred to as PSUs) that were granted to them as part of their long-term incentive award opportunity for the 2008-2010 three-year performance cycle. Over that three-year period, Verizon’s total shareholder return, or TSR, ranked in the 61st percentile when compared to the Related Dow Peers, outperforming this peer group.
  • CEO 2008-2010 Long-Term Incentive Earned Based on Strategic Initiatives. In determining the 2008-2010 PSU payment for Mr. Seidenberg, the Committee and the independent members of the Board also evaluated the Company’s performance relating to five strategic areas identified at the beginning of the performance period. Based upon his leadership with respect to the strategic areas as described on pages 39-40, Mr. Seidenberg’s 2008-2010 PSU payment included approximately $13.8 million in addition to the amount that was determined based on the relative TSR formula for all executives.
  • 2010-2012 Long-Term Incentive Awards. As in prior years, the long-term incentives awarded to the named executive officers in 2010 consisted of PSUs that vest based on Verizon’s TSR for the 2010-2012 performance cycle and, for each executive other than Mr. Seidenberg, restricted stock units (referred to as RSUs) that vest based on the executive’s continued service with Verizon through the end of the three-year performance cycle. In consideration of the overall economic conditions, the Committee reduced the target value of the 2010 awards by approximately 15%, as it did for the 2009 awards.
  • Elimination of Employment Agreements/Adoption of Severance Plan. The Committee decided not to extend any outstanding Verizon executive employment agreements. As a result, as of December 31, 2010, each of Verizon’s outstanding executive employment agreements had expired by its terms. In conjunction with this decision, the Board adopted the Verizon Senior Manager Severance Plan in order to maintain a competitive level of separation benefits. The independent members of the Board, in consultation with Mr. Seidenberg, decided that all senior managers of the Company, including the named executive officers other than Mr. Seidenberg, would be eligible to participate in this plan. This plan is described on pages 41-42.

Program and Practices

Our commitment to following best compensation and governance practices is reflected in the design of our compensation program. Some of these elements include:

  • Pay-for-Performance. Our compensation program is designed to reward performance that creates long-term shareholder value. This is reflected in the long-term orientation of the total compensation mix; the substantial linkage of compensation to long-term stock performance through the awards of PSUs; and median pay positioning, which is described in more detail later in this section. The Company also has a record of providing a compensation program that is strongly aligned with both absolute and relative performance, which is demonstrated by the grant and payout levels of our short-term and long-term incentives.
  • Benchmarking Total Compensation. The Committee benchmarks each executive’s total compensation opportunity against a single peer group, referred to as the Related Dow Peers and described on page 32. The Committee references the 50th percentile of the Related Dow Peers for total compensation opportunity, with additional consideration given to the tenure, overall level of responsibility and performance of a particular executive.
  • Compensation Best Practices. The Committee regularly considers competitive market trends and seeks to understand the views of shareholders, including the results of our annual advisory vote on executive compensation, when adopting new, emerging compensation best practices or considering changes to existing policies. As a result of this process, the Committee has adopted many best practices over the years, including:
    • Advisory votes on executive compensation beginning in 2009;
    • Eliminating guaranteed pension and supplemental retirement benefits;
    • Eliminating Section 280G and other tax gross-ups;
    • Eliminating personal use of aircraft following retirement for the CEO and future CEOs;
    • Eliminating an employment agreement for the CEO in 2004 and the other outstanding executive employment agreements beginning in 2010;
    • Adopting a “claw back” policy to recapture and cancel incentive payments received by executives who engage in financial misconduct; and
    • Settling RSUs in shares.
  • Evaluation of Potential Linkage between Compensation and Risk Taking. When reviewing the compensation program and the performance metrics, the Committee considers the impact of the compensation program on the Company’s risk profile. The Committee believes that Verizon’s compensation program has been structured to provide strong incentives for executives to appropriately balance risk and reward consistent with the Company’s enterprise business risk management efforts.

Compensation Objectives

Align Executives’ and Shareholders’ Interests Through Performance-Based Compensation

To promote a performance-based culture that links the interests of management and shareholders, the Committee has developed a compensation program that focuses extensively on variable, performance-based compensation. The largest portion of compensation is based on performance against challenging pre-established metrics, while fixed compensation in the form of base salary constitutes only a relatively small percentage of each executive’s compensation opportunity. In addition, our executive compensation program does not include such fixed compensation elements as guaranteed defined benefit pension and supplemental pension benefits.

In establishing the performance objectives used in the Company’s pay-for-performance program, the Committee balances the importance of meeting the Company’s short-term business goals with the need to create shareholder value over the longer term. To help ensure that the interests of Verizon executives remain closely aligned with the interests of shareholders, target long-term compensation opportunities represent more than three times the target compensation opportunities related to short-term performance. In addition, as described in detail below, the Committee has adopted a pay strategy that is designed to pay median compensation for market performance, above median compensation for above market performance, and below median compensation for below market performance. The Committee implements this policy by starting with target compensation for executive officers that generally references the 50th percentile of the Related Dow Peers, and letting performance drive actual compensation to above or below median pay levels. This approach provides strong alignment between our executive pay and shareholder value creation.

To motivate executives to achieve short- and long-term goals, the Committee has established incentive awards that are earned based on the Company’s performance over one- and three-year periods. After considering a variety of data including the practices of its peers, trends and input from large institutional investors, the Committee determined that Verizon’s short-term compensation opportunities should continue to be based upon Verizon’s stand-alone performance against absolute goals, while Verizon’s long-term compensation opportunities should continue to be based upon Verizon’s performance relative to peer companies. This practice is generally consistent with the compensation practices of the Related Dow Peers.

Attract, Retain and Motivate High-Performing Executives

In order to attract, retain and motivate executives, the Company’s compensation program features:

  • Compensation opportunities that we believe are competitive with Verizon’s peer companies; and
  • Three-year long-term incentive awards, including RSUs that vest based on the executive’s continued employment through the end of the three-year performance cycle, that encourage high-performing executives to remain with the Company.

Role of Benchmarking and the Related Dow Peers

In order to determine whether the compensation opportunities for executives are appropriate and competitive, the Committee compares each named executive officer’s total compensation opportunity to the total compensation opportunities for executives in comparable positions at peer companies. (As used in this discussion, the term “total compensation” means the aggregate amount of the executive’s base salary and target award amounts under the short-term and long-term incentive plans described below.) The Committee uses a single peer group that includes the 29 companies (other than Verizon) in the Dow Jones Industrial Average, plus Verizon’s four largest competitors that are not included in the Dow Jones Industrial Average. This group is referred to as the Related Dow Peers. This peer group is self-adjusting so that changes in the companies included in the Dow Jones Industrial Average are also reflected in the Related Dow Peers over time.

The Committee generally references the 50th percentile of the Related Dow Peers for total compensation opportunity. However, depending upon the tenure, overall level of responsibility and performance of a particular executive, the total compensation opportunity may be above or below the 50th percentile. The Committee believes that this is an appropriate targeted level of total compensation opportunity because of Verizon’s emphasis on performance-based incentive pay, Verizon’s size relative to the Related Dow Peers and the elimination of certain fixed pay elements, including guaranteed defined benefit pension and supplemental pension benefits. Actual total compensation may fall above or below the targeted percentile based on annual and long-term performance.

The Committee believes the companies in the Related Dow Peers represent Verizon’s primary competitors for executive talent and investor dollars. The Committee believes that this group of companies, comprised of similarly-sized companies that are included in an established and recognizable index, as well as Verizon’s four largest industry competitors, provides a consistent measure of Verizon’s performance and makes it easier for shareholders to evaluate, monitor and understand Verizon’s compensation program. Accordingly, the Committee determined that it was appropriate to benchmark both total compensation opportunities and Verizon’s relative stock performance under its long-term incentive plan against the Related Dow Peers.

The following chart lists the companies included in the Related Dow Peers as of December 31, 2010, and their market capitalization as of December 31, 2010, as reported by Bloomberg, and net income attributable to the company, revenue and total employees, as of each company’s most recent fiscal year-end as reported in SEC filings.

Related Dow Peers




Company



Market Capitalization
($ Millions)

Net Income
Attributable to
the Company
($ Millions)



Revenue
($ Millions)



Total
Employees

3M

61,692

 

4,085

 

26,662

 

80,057

 

Alcoa

15,720

 

254

 

21,013

 

59,000

 

American Express

51,666

 

4,057

 

30,242

 

61,000

 

AT&T

173,636

 

19,864

 

124,280

 

265,410

 

Bank of America

134,536

 

(2,238

)

135,161

 

286,951

 

Boeing

47,873

 

3,307

 

64,306

 

160,500

 

Caterpillar

59,446

 

2,700

 

42,588

 

104,490

 

Chevron

183,634

 

19,024

 

198,198

 

62,000

 

Cisco Systems

112,130

 

7,767

 

40,040

 

70,700

 

Coca-Cola

152,720

 

11,809

 

35,119

 

139,600

 

Comcast

60,468

 

3,635

 

37,937

 

102,000

 

Du Pont (E.I.)

45,535

 

3,031

 

31,505

 

60,000

 

Exxon Mobil

368,712

 

30,460

 

383,221

 

83,600

 

General Electric

194,875

 

11,644

 

149,060

 

287,000

 

Hewlett-Packard

92,217

 

8,761

 

126,033

 

324,600

 

Home Depot

57,457

 

3,338

 

67,997

 

300,000

 

Intel

117,305

 

11,464

 

43,623

 

82,500

 

IBM

182,329

 

14,833

 

99,870

 

426,751

 

Johnson & Johnson

169,856

 

13,334

 

61,587

 

114,000

 

JPMorgan Chase

165,827

 

17,370

 

115,475

 

239,831

 

Kraft Foods

55,041

 

4,114

 

49,207

 

127,000

 

McDonald’s

81,097

 

4,946

 

24,075

 

400,000

 

Merck

111,035

 

861

 

45,987

 

94,000

 

Microsoft

238,785

 

18,760

 

62,484

 

89,000

 

Pfizer

140,254

 

8,257

 

67,809

 

110,600

 

Procter & Gamble

180,072

 

12,736

 

78,938

 

127,000

 

Qwest

13,262

 

(55

)

11,730

 

28,343

 

Sprint Nextel

12,635

 

(3,465

)

32,563

 

40,000

 

Time Warner Cable

23,489

 

1,308

 

18,868

 

47,500

 

Travelers

25,573

 

3,216

 

25,112

 

32,000

 

United Technologies

72,691

 

4,373

 

54,326

 

208,200

 

Wal-Mart

192,098

 

16,389

 

421,849

 

2,000,000

 

Walt Disney

71,028

 

3,963

 

38,063

 

149,000

 

Verizon

101,142

 

2,549

 

106,565

 

194,400

 

Verizon’s Ranking

17

 

28

 

9

 

11

 

Verizon’s Percentile Ranking

53%

 

21%

 

76%

 

71%

 

Elements of Compensation

In setting total compensation at competitive levels, the Committee determines the appropriate balance between:

  • Fixed and variable pay elements;
  • Short- and long-term pay elements; and
  • Cash and equity-based pay elements.

The following table illustrates the principal elements of Verizon’s executive compensation program and the percentage that each element represents of the named executive officers’ total compensation opportunity.

Pay Element

Primary Objective

% of Targeted
Compensation
Opportunity
(Approximate)

Base salary

Attract and compensate high-performing and experienced executives

10%

Annual incentive opportunity

Motivate executives to achieve challenging short-term performance measures

20%

Long-term incentive opportunity

Align executives’ interests with those of shareholders to grow long-term value and retain executives

70%

The named executive officers are eligible to receive medical, disability and savings plan benefits that are generally provided to all management employees. The named executive officers, other than Mr. Seidenberg, are eligible for cash severance benefits, which are provided in order to attract and retain high-performing executives. The named executive officers are also eligible for certain executive life insurance, financial planning and corporate transportation benefits, which are provided in order to attract and retain high-performing executives and to help minimize any risks to the executives’ safety and security.

2010 Annual Base Salary

To determine an executive’s base salary, the Committee, in consultation with the Consultant, reviews the competitive pay practices of the Related Dow Peers for comparable positions and considers the scope of the executive’s responsibility and experience. In particular, the Committee focuses on how base salary levels may impact the market competitiveness of an executive’s total compensation opportunity. The Committee also discusses its assessment of the other named executive officers with the CEO. Based on its assessment, the Committee approved the following base salary increases for Messrs. McAdam, Mead and Shammo, effective November 1, 2010, in connection with their promotions: Mr. McAdam, an increase from $825,000 to $1,400,000; Mr. Mead, an increase from $575,000 to $725,000; and Mr. Shammo, an increase from $600,000 to $675,000. The base salaries for Messrs. McAdam, Mead and Shammo were targeted to provide an appropriate level of total compensation opportunity as compared to similar positions within the Related Dow Peers. No other named executive officer received a base salary increase in 2010.

2010 Short-Term Incentive Compensation

The Verizon Short-Term Incentive Plan, which is referred to as the Short-Term Plan, motivates executives to achieve challenging short-term performance goals. Each year, the Committee establishes the potential value of the opportunities under the Short-Term Plan, as well as the performance targets required to achieve these opportunities.

The Committee sets the values of the Short-Term Plan award opportunities as a percentage of an executive’s base salary. The applicable percentage for each named executive officer is based on the scope of the executive’s responsibility and on the competitive pay practices of the Related Dow Peers for comparable positions. These award opportunities are established at threshold, target and maximum levels, each of which is dependent on achieving different performance goals. The Short-Term Plan award opportunities for each of the named executive officers are shown in the Grants of Plan-Based Awards table on page 46.

The following chart shows the 2010 Short-Term Plan target award opportunity for each of the named executive officers.


Named Executive Officer

2010 Short-Term Plan
Target Award Opportunity

Mr. Seidenberg

$

3,937,500

Mr. McAdam

$

1,736,538

Ms. Ruesterholz

$

787,500

Mr. Mead

$

815,625

Mr. Shammo

$

759,375

Mr. Killian

$

928,125

The 2010 target award opportunities for Messrs. Seidenberg and Killian and Ms. Ruesterholz did not increase from the target levels established for their 2009 award opportunities. In connection with his promotion to President and Chief Operating Officer, in November 2010, Mr. McAdam’s 2010 target award opportunity was increased from 112.5% to 187.5% of his base salary on a prorated basis. The 2010 target award opportunities for Messrs. Mead and Shammo increased over their 2009 target award opportunities solely as a result of their base salary increases identified above (i.e., their target opportunities, expressed as a percentage of their respective base salaries, did not change). Whether, and the extent to which, the named executive officers earn the targeted Short-Term Plan award is determined based on whether Verizon achieves performance measures established by the Committee at the beginning of the year.

Determination of Annual Performance Measures

The Committee reviews and establishes the performance measures for the Short-Term Plan on an annual basis to help ensure that the program design appropriately motivates executives to achieve challenging financial and operational performance goals. In the first quarter of 2010, the Committee reviewed and approved the following annual financial and operating performance measures for all of Verizon’s corporate executives, including the named executive officers, and ascribed to each the weighting shown below.

Performance Measure

% of Total Award at Target

Adjusted EPS

45%

Revenue

30%

Free Cash Flow

20%

Diversity

5%

The Committee based the Short-Term Plan award opportunities for all corporate executive officers, including the named executive officers, on three Company-wide financial performance measures, as determined by specific goals for adjusted EPS, revenue and free cash flow. Using these measures provides balance within the Short-Term Plan because executives can only achieve a maximum total award when there is significant profitability, significant revenue and significant free cash flow. The Committee also recognized that the executives must successfully manage the challenges for each business segment to create revenue, segment operating earnings and free cash flow in order to achieve the overall Company performance goals. As a result, the Committee believes that these performance measures are appropriate to motivate the Company’s executives to achieve outstanding short-term results and to build long-term value for shareholders.

Adjusted EPS. The Committee views adjusted EPS as an important indicator of Verizon’s success and assigns the greatest weight to adjusted EPS in determining awards under the Short-Term Plan because it is broadly used and recognized by investors as a significant indicator of Verizon’s ongoing operational performance. Adjusted EPS excludes non-recurring and non-operational items, such as impairments and gains and losses from discontinued operations, business combinations, changes in accounting principles, extraordinary items and restructurings. As a result, adjusted EPS is not positively or negatively impacted from period to period by these types of items, so it better reflects the relative success of the Company’s ongoing business.

In setting the adjusted EPS target for 2010 and in evaluating the Company’s success in meeting that target, the Committee took into account that the Company’s stock repurchases were within the limits of the stock repurchase plan approved by the Board at the time the adjusted EPS target was established.

In addition, the Committee reviewed the net impact of pension and post-retirement benefit costs on adjusted EPS and excluded these costs in determining the adjusted EPS measure for compensation purposes.

Revenue. The Committee also views achievement of consolidated total revenue goals as an important indicator of the Company’s success in managing its capital investments. This measure also reflects the level of penetration of Verizon’s products and services in key markets.

Free Cash Flow. The Committee views consolidated free cash flow as another important indicator of Verizon’s success in delivering shareholder value, because investors often consider free cash flow as part of their equity valuation models. Free cash flow is determined by subtracting capital expenditures from cash flow from operations. The Committee believes that this type of cash flow measure is relevant for Verizon because it is an indication of the amount of cash that the Company has available to return to shareholders in the form of dividends and to reduce its outstanding debt, which is an important financial goal.

Diversity. The Company is committed to promoting diversity among its employees and to recognizing and encouraging the contribution of diverse business partners to the Company’s success. To reflect that important commitment, the 2010 performance measures also include a diversity measure. For 2010, the Committee determined that the diversity target would be measured for these purposes by the percentage of new hires and promotions at and above the manager level consisting of minority and female candidates and the levels of supplier spending at the corporate level to minority- and female-owned or operated firms.

The value of the Short-Term Plan award opportunity with respect to each performance measure varies depending on the Company’s performance with respect to that measure. The Committee also has the discretion to modify awards based on other factors that it deems appropriate. If the Company’s performance is below the required threshold for all of the performance measures, no award will be paid under the Short-Term Plan for that year.

In addition, under the Short-Term Plan no awards may be paid if Verizon’s return on equity for the plan year, calculated based on adjusted net income, does not exceed 8%, even if some or all of the performance measures are achieved.

2010 Annual Performance Measures

The 2010 annual performance measures for the named executive officers are shown below:

  • An adjusted EPS target range of $2.24 to $2.32;
  • A consolidated total revenue target range of $107.4 billion to $109.5 billion;
  • A consolidated free cash flow target range of $10.8 billion to $12.2 billion; and
  • A diversity target of (i) having 50% of new hires and promotions at and above the manager level consist of minority and female candidates, and (ii) directing at least 9.6% of the overall supplier spending at the corporate level to minority- and female-owned or operated firms.

2010 Company Results and Annual Performance Awards

In 2010, Verizon reported generally strong results. Verizon’s 2010 performance results included:

  • Return on equity of 14.7%1;
  • Adjusted EPS of $2.201, which, the Committee noted, would have been $2.24 if the Company had not changed its accounting with respect to pension and other post-retirement benefits in the fourth quarter of 2010;
  • Consolidated total revenue of $106.6 billion, or 0.8% below the target performance measure range as described above;
  • Consolidated free cash flow of $16.9 billion2, or 38.6% higher than the top of the target performance measure range as described above; and
  • 66% of the diversity measure for new hires and promotions and 13.9% of the diversity supplier spending measure, exceeding the target range for both measures.

After considering the level of performance, the Committee and, for Mr. Seidenberg, the independent members of the Board, approved payment of Short-Term Plan awards at 100% of the target level. The following table shows the amount of the Short-Term Plan awards paid to each named executive officer.


Named Executive Officer

Actual
2010 Short-Term Plan Award

Mr. Seidenberg

$

3,937,500

 

Mr. McAdam

$

1,736,538

 

Ms. Ruesterholz

$

787,500

 

Mr. Mead

$

815,625

 

Mr. Shammo

$

759,375

 

Mr. Killian

$

928,125

 

Long-Term Incentive Compensation

The Verizon Long-Term Incentive Plan, which is referred to as the Long-Term Plan, is intended to reward participants for the creation of long-term shareholder value over a three-year period. In considering the appropriate duration of the performance cycle under the Long-Term Plan, the Committee believes that it is important to establish a period that is longer than one year in order to meaningfully evaluate the performance of long-term strategies and the effect on value returned to shareholders. The Committee determined that a three-year performance cycle for the Long-Term Plan awards was appropriate. For each performance cycle, the Committee establishes target award opportunities that are set as a percentage of base salary.

Currently, long-term incentive awards consist of PSUs and RSUs. For 2010 awards, the PSUs are payable in cash and the RSUs are payable in Verizon shares, which is a change from prior years in which RSUs were also payable in cash. The Committee, in consultation with the Consultant, determined that paying the 2010 RSU awards in shares would be consistent with Verizon’s policy of requiring a significant level of equity ownership by our named executive officers and that paying PSUs in cash and RSUs in shares creates an appropriate balance between the alignment of executives’ interests with those of Verizon’s shareholders, the potential impact on shareholder dilution and cash flow considerations.

The value of each PSU is equal to the value of one share of Verizon common stock and accrues dividend equivalents that are deemed to be reinvested in PSUs. The dividend equivalents are only paid to the extent that PSUs are vested and earned. The Committee determines an executive’s compensation opportunity by assuming that he or she will earn 100% of the PSUs initially awarded in any performance cycle. However, the number of PSUs that are actually earned and paid is determined based on Verizon’s TSR as compared to the Related Dow Peers as constituted on the grant date of the award over the three-year performance cycle. The final value of each PSU is based on the closing price of Verizon’s stock on the last trading day of the year that the performance cycle ends. As a result, awarding PSUs provides a strong incentive to executives to deliver value to Verizon’s shareholders.

On the date of the long-term incentive award, the Committee also establishes the number of RSUs that may be earned based on the executive’s continued employment with the Company through the end of the three-year award cycle. The value of each RSU is equal to the value of one share of Verizon common stock and accrues dividend equivalents that are deemed to be reinvested in RSUs. The dividend equivalents are only paid to the extent that RSUs are vested and earned. The 2010 RSU awards are payable in shares at the end of the three-year award cycle and provide both a retention incentive and a performance incentive as the value of the award depends on Verizon’s stock price.

2010 Long-Term Plan Award Opportunities

For 2010, Messrs. McAdam, Mead, Shammo and Killian and Ms. Ruesterholz received 60% of their 2010 Long-Term Plan award opportunity in the form of PSUs and 40% in the form of RSUs. This allocation reflects the Committee’s focus on encouraging both outstanding relative TSR performance and the retention of the Company’s highly-qualified executive team. Because the Committee believes that the CEO has the primary responsibility for the overall success of Verizon’s strategic growth initiatives and for increasing the value of Verizon’s stock, Mr. Seidenberg’s entire Long-Term Plan award opportunity for 2010, consistent with prior performance cycles, consists of PSUs. Also, consistent with prior performance cycles, Mr. Seidenberg’s 2010 award provides a separate opportunity to earn an additional payout based upon the Company’s performance relating to certain pre-established strategic initiatives, as described below.

The Committee generally establishes an executive’s Long-Term Plan target award opportunity as a percentage of the executive’s base salary. The Long-Term Plan target award opportunity for the named executive officers in 2010 was: 625% of base salary for Mr. Seidenberg, 525% of base salary for Mr. McAdam (for the portion of the year prior to his promotion to President and Chief Operating Officer in November 2010) and 525% of base salary for Messrs. Mead, Shammo and Killian and Ms. Ruesterholz. These targets are the same as the target awards for the prior year. In connection with Mr. McAdam’s promotion, his target award opportunity was increased from 525% to 625% of his base salary, effective in November 2010. As a result, Mr. McAdam received a prorated incremental long-term incentive award in November 2010 to reflect the increase in his target award opportunity. Notwithstanding the target award opportunities, in consideration of the overall economic conditions, the Committee decided to reduce the 2010 Long-Term Plan awards by approximately 15% below these target levels, similar to the 2009 awards.

The following table shows the target value of the awards granted to the named executive officers during 2010 in connection with the annual long-term incentive compensation opportunity. A description of the 2010 PSU awards, including the performance requirements, follows the table.



Named Executive Officer

2010 Long-Term Plan
Target Award
Opportunity



PSUs



RSUs

Mr. Seidenberg

$

11,156,252

 

100%

0%

Mr. McAdam

$

4,307,642

*

60%

40%

Ms. Ruesterholz

$

3,123,791

 

60%

40%

Mr. Mead

$

2,565,964

 

60%

40%

Mr. Shammo

$

2,677,535

 

60%

40%

Mr. Killian

$

3,681,589

 

60%

40%

* Includes a prorated incremental award granted in connection with Mr. McAdam’s compensation adjustment in November 2010 due to his promotion.

Terms of 2010 PSU Awards

The following table shows the percentage of PSUs awarded for the 2010-2012 performance cycle that can be earned based on a range of relative TSR positioning compared with the companies in the Related Dow Peers.

Verizon’s Relative TSR
Ranking Among the
Companies in the
Related Dow Peers

Corresponding Relative
TSR Percentile
Ranking Among the
Companies in the
Related Dow Peers



Percentage of
Awarded  PSUs
that will be Earned





Performance Level

1

4

91st

to

100th

200%

Maximum

5

8

79th

to

88th

175%


Above Target, Below Maximum

9

12

67th

to

76th

150%

13

16

55th

to

64th

100%

Target

17

21

39th

to

52nd

75%

Below Target, Above Threshold

22

25

27th

to

36th

50%

Threshold

26

34

0

to

24th

0%

Below Threshold

Verizon’s TSR during the three-year performance cycle must rank at least 16th, or at the 55th percentile (above median), among the members of the Related Dow Peers in order to earn 100% of the target number of PSUs. Similarly, the maximum number of PSUs (200% of target) can only be earned if Verizon’s TSR during the three-year performance cycle ranks among the top four companies in the Related Dow Peers, which corresponds to the 91st percentile or higher. If Verizon’s TSR during the three-year performance cycle is below approximately the 27th percentile of the companies in the Related Dow Peers, none of the PSUs will be earned.

Under Mr. Seidenberg’s 2010 PSU award, the Committee may recommend that the independent members of the Board increase his payout (up to a maximum equal to the amount he would have received if 200% of his 2010 PSU award vested, including any dividend equivalents that would have been paid on those PSUs) based on the Company’s performance during the three-year performance cycle in the following strategic areas: (i) developing Verizon’s executive talent pool and preparing for Verizon’s succession plan; (ii) maintaining Verizon Wireless’ market leadership position, (iii) sustaining Verizon’s top line consolidated revenue growth at a level above Verizon’s industry peers; (iv) achieving FiOS platform customer growth of 50%; and (v) participating in and providing leadership to various industry forums and policy initiatives. The Committee did not assign a particular weight to any of these strategic initiatives when the award was granted and has the discretion to recommend to the independent members of the Board whether and to what degree the award should be increased. However, if Verizon’s relative TSR performance during the measurement period does not merit any payout of PSUs, Mr. Seidenberg will not receive any payment of his 2010 PSU award (including any portion relating to these strategic initiatives). In addition, Mr. Seidenberg’s total payout under his 2010 PSU award, including the amount earned based on relative TSR performance and the amount earned based on achievement of strategic initiatives cannot exceed the amount that would be payable if the percentage of earned PSUs was equal to 200% of the number of PSUs awarded, including any applicable dividend equivalents.

2008 PSU Awards Earned in 2010

With respect to the PSUs awarded in 2008, the Committee determined the number of PSUs a participant earned based on Verizon’s TSR for the 2008-2010 three-year performance cycle relative to the TSRs of the Related Dow Peers as constituted on the date the award was granted. The percentage of the awarded PSUs that would be earned based on different levels of Verizon’s relative TSR performance under the 2008-2010 awards were the same as those described above with respect to the 2010 awards.

Over the three-year performance cycle ending on December 31, 2010, Verizon’s TSR ranked in the 61st percentile when compared to the Related Dow Peers. As a result, the Committee approved in 2011 a payment to all participants of 100% of the number of PSUs awarded for the 2008-2010 performance cycle.

Mr. Seidenberg’s 2008 PSU Award. As a participant in the Long-Term Plan, Mr. Seidenberg received the same percentage of the 2008 PSUs as all other participants in the plan based on the Company’s TSR performance relative to the Related Dow Peers. In addition, the Committee also had the discretion to recommend that the Board increase his payout for the 2008-2010 performance cycle to a total level that did not exceed 200% of the number of PSUs awarded to him, including any applicable dividend equivalents, based on the Company’s performance during that three-year period with respect to the following strategic initiatives: (i) maintaining Verizon Wireless’ market leadership position; (ii) sustaining Verizon’s top line consolidated total revenue growth at 5-6%; (iii) developing Verizon’s executive talent pool and preparing Verizon’s succession plan; (iv) participating in and providing leadership to various industry forums and policy initiatives; and (v) producing double-digit consolidated earnings growth. These strategic initiatives were established at the start of the three-year performance period, and the Committee did not assign any specific weighting to each strategic initiative. After the end of the performance period, in assessing whether an increased payment was appropriate, the Committee and the Board reviewed each strategic initiative and considered Mr. Seidenberg’s leadership, guidance and contribution to the following achievements. The Committee and the Board placed particular emphasis on the positioning of the Company’s executive leadership team in 2010 and the successful culmination of a multi-year succession planning process.

  • During the three-year performance period, Mr. Seidenberg guided a CEO succession process that has culminated in the Board naming Lowell C. McAdam as President and Chief Operating Officer. As part of that process, a number of other key executives were identified and elevated to new positions in order to position the Company’s management for the future.
  • During a period of considerable change in the industry, as data-intensive devices changed the wireless communications landscape, Verizon Wireless maintained its industry leadership with industry leading revenue, customers and retail postpaid churn throughout the performance period. As of December 31, 2010, Verizon Wireless held a 32.0% market share based on the number of customers. Domestic Wireless customers increased over the period by 43.3% from 65.7 million to 94.1 million. Retail postpaid churn remained the lowest in the industry at 1.02% at the end of the three-year period. Wireless data revenues more than doubled over the period, increasing by $12.2 billion. Verizon Wireless developed a successful smartphone franchise around the Android operating system and rounded out its smartphone offerings with the Apple iPhone. In addition, Verizon Wireless was the first company to launch a 4G broadband network with significant national coverage based on long-term evolution technology – a standard which is expected to be the predominant standard worldwide.
  • During the three-year performance period, Verizon achieved average annual top line revenue growth of 4.5% notwithstanding the fact that the Company faced a recessionary economy and significant competition and secular changes to the industry.
  • Mr. Seidenberg currently serves as the Chairman of Business Roundtable, an influential association of CEOs of major companies. In 2010, President Barack Obama appointed him to the President’s Export Council, which advises the President on how to promote U.S. exports, jobs and growth. Earlier in the performance period, he served on the National Security Telecommunications Advisory Committee, to which he was appointed by former President George W. Bush.
  • Earnings growth remained flat due primarily to lower revenue in the wireline segment. Over the three-year performance period, resources have been devoted to higher growth markets in wireless and enterprise versus traditional wireline voice markets, and non-strategic wireline assets in a total of 17 states have been divested. During the period, revenues from FiOS have grown to $6.9 billion or over half of consumer revenue, and revenues from enterprise strategic services have grown to $6.6 billion, or 42% of enterprise revenues.

Based on the successful achievement of these strategic initiatives, the Committee recommended and the independent members of the Board approved paying Mr. Seidenberg approximately $13.8 million under the terms of his 2008-2010 PSU award agreement in addition to the amount that was payable to him based solely on Verizon’s relative TSR performance over the 2008-2010 performance cycle. This level reflects the Committee’s and the independent Board members’ evaluation that Mr. Seidenberg demonstrated very strong performance achievement over the three-year period, warranting a payout at just below the maximum award potential.

As previously noted, the Committee encourages a pay-for-performance environment by linking long-term compensation opportunities to the creation of sustained shareholder value. The Committee reviews the potential payouts for varying levels of performance under the Long-Term Plan to ensure that they are consistent with aligning executive compensation with the creation of shareholder value. For the three-year period ending on December 31, 2010, under Mr. Seidenberg’s leadership, Verizon’s stock delivered a total return of positive 4.7%, which compared to a total return of negative 8.3% for the Standard and Poor’s 500 Index and 2.9% total return for the median company in the Related Dow Peers over the same three-year period. In addition, during this period Verizon made significant capital investments in its business to help facilitate future growth opportunities in its most strategic areas. The Committee recommended and the Board concluded that the total payment to Mr. Seidenberg was consistent with the level of value created for shareholders over this three-year period.

Other Elements of the Total Compensation Program

The Company also provides the named executive officers with certain personal benefits as generally described below. The Committee believes that these programs provide an important recruiting and retention tool that is a valuable component of Verizon’s overall compensation plan.

Transportation

The Company provides certain aircraft and ground transportation benefits to enhance the safety and security of certain of the named executive officers. Additional information on Company-provided transportation is included in footnote 4 to the Summary Compensation Table on page 45.

Executive Life Insurance

The Company offers the named executive officers and other executive employees the opportunity to participate in an executive life insurance program in lieu of participation in the Company’s basic and supplemental life insurance programs. The executives who elect to participate in the executive life insurance program own the life insurance policy and the Company provides an annual cash payment to the executives to defray a portion of the annual premiums. Additional information on this program is provided in footnote 4 to the Summary Compensation Table on page 45.

Financial Planning

The Company provides a voluntary Company-sponsored financial planning benefit program for the named executive officers and other executive employees. Additional information on this program is provided in footnote 4 to the Summary Compensation Table on page 45.

Retirement Benefits

Effective June 30, 2006, Verizon froze all future pension accruals under its management tax-qualified and supplemental defined benefit retirement plans. The Committee determined that guaranteed pay in the form of pension and supplemental executive retirement benefits was not consistent with the Company’s pay-for-performance culture. These legacy retirement benefits that were previously provided to Verizon’s named executive officers are described in more detail under the section entitled “Pension Plans” on pages 48-49.

During 2010, all of Verizon’s named executive officers were eligible to participate in the Company’s tax-qualified and nonqualified savings plans. These plans are described in the section entitled “Defined Contribution Savings Plans” on pages 49-51.

Severance and Change in Control Benefits

The Committee believes that maintaining a competitive level of separation benefits is appropriate as part of an overall program designed to attract, retain and motivate the highest quality management team. However, the Committee does not believe that named executive officers should be entitled to receive cash severance benefits merely because a change in control transaction occurs. Therefore, the payment of cash severance benefits is triggered only by an actual or constructive termination of employment.

During 2010, the Company was a party to an employment agreement with each of Messrs. McAdam and Killian and Ms. Ruesterholz that provided for severance benefits. The severance benefits and the circumstances under which severance benefits would be payable under the employment agreements were based on each executive’s position and tenure with the Company and competitive practices among the Company’s peers at the time the agreements were executed. In February 2010, the Committee decided that it would not extend any outstanding Verizon executive employment agreements. As a result, each of the employment agreements terminated on December 31, 2010, including eligibility for any separation benefits provided under these agreements. The severance benefits that were provided under these expired agreements are described in more detail on pages 53-54. The Company was not a party to an employment agreement with any of the other named executive officers in 2010.

In connection with the decision by the Committee to not renew any of the outstanding employment agreements, after consultation with Mr. Seidenberg, the Committee recommended and the independent members of the Board approved the adoption of the Verizon Senior Manager Severance Plan, which provides certain separation benefits to participants whose employment is involuntarily terminated without cause from the Company. This plan generally memorializes the terms and conditions of Verizon’s senior manager severance policy and is consistent with the terms and conditions of Verizon’s broad-based severance plan that is provided to all of Verizon’s management employees. All senior managers of the Company (including each of the named executive officers other than Mr. Seidenberg) are eligible to participate in this plan. To the extent that a senior manager is eligible for severance benefits under any other arrangement, that person will not be eligible for any duplicative benefits under the severance plan. Under the severance plan, to the extent a participant has been involuntarily terminated without cause or, in the case of a named executive officer, to the extent that the independent members of the Board determine that there has been a qualifying separation, the participant is eligible to receive a lump-sum cash separation payment equal to a multiple of their base salary and target short-term incentive opportunity, along with continuing medical coverage for the applicable severance period. The plan does not provide for any severance benefits based upon a change in control of the Company.

The named executive officers are eligible to receive a cash separation payment based on a formula equal to two times the sum of their base salary and target short-term incentive opportunity. Other senior manager participants are eligible to receive a cash separation payment based on a formula equal to between 0.75 and two times their base salary and target short-term incentive opportunity depending on their position at the time of their separation from employment. In order to be eligible for any severance benefits, participants must execute a release satisfactory to Verizon and agree not to compete or interfere with any Verizon business for a period of one year after their separation from employment. As noted, Mr. Seidenberg is not eligible to participate in the severance plan nor is he eligible to receive any other cash separation payments from the Company upon his termination from service.

Mr. Killian retired from the Company effective December 31, 2010. In connection with Mr. Killian’s retirement, the independent members of the Board determined that Mr. Killian’s retirement was a qualifying separation for purposes of the Senior Manager Severance Plan. The benefits that Mr. Killian became entitled to receive upon his retirement are described in more detail in the section entitled “Potential Payments Upon Termination or Change in Control – Retirement of Mr. Killian” on page 56. In addition, Mr. Killian is eligible to receive certain other benefits as a retiree of the Company. At the time of his retirement and as required by the Senior Manager Severance Plan as a condition to receive separation benefits, Mr. Killian executed a release and agreed that he will not compete or interfere with any Verizon business for a period of one year after his separation from service. In December 2009, Mr. Killian received a special PSU award as part of Verizon’s long term strategic and succession planning process, which was scheduled to vest after the completion of the three-year performance cycle ending December 31, 2012 if certain return on equity targets were achieved. Mr. Killian forfeited this award upon his retirement.

Consistent with the Committee’s belief that named executive officers should not be entitled to receive cash severance benefits merely because a change in control transaction occurs, in 2009 the Long-Term Plan was amended to eliminate “single trigger” accelerated vesting and payment of outstanding awards in connection with a change in control of Verizon. Under the amended plan, if, in the twelve months following a change in control the participant’s employment is terminated by Verizon without cause, all then-unvested PSUs will fully vest at target level performance, all then-unvested RSUs will fully vest and PSUs and RSUs (including dividend equivalents accrued to date) will become payable on the regularly scheduled payment date after the end of the applicable award cycle. With respect to awards granted under the Long-Term Plan prior to that date, upon a change in control of Verizon all then-unvested PSUs will fully vest and be payable immediately at target performance, and all then-unvested RSUs will fully vest and become payable immediately. The Company believes this single trigger vesting was consistent with competitive practices among the Company’s peers at the time the Long-Term Plan was put in place, but is no longer reflective of the Committee’s current policy or current competitive practices. None of the named executive officers is eligible for any tax gross-up payment with respect to the excise tax liability under Internal Revenue Code Section 4999 related to any Section 280G excess parachute payments.

Shareholder Approval of Certain Severance Arrangements

Because the Committee believes that shareholders should have input in the Company’s executive compensation program, the Committee has maintained a policy, last revised in 2007, of seeking shareholder approval or ratification of any new employment agreement or severance agreement with an executive officer that provides for a total cash value severance payment exceeding 2.99 times the sum of the executive’s base salary plus Short-Term Plan incentive target opportunity. The policy defines severance pay broadly to include payments for any consulting services, payments to secure a non-compete agreement, payments to settle any litigation or claim, payments to offset tax liabilities, payments or benefits that are not generally available to similarly-situated management employees and payments in excess of, or outside, the terms of a Company plan or policy.

Tax and Accounting Considerations

Federal income tax law generally prohibits publicly-held companies from deducting compensation paid to a named executive officer (other than a chief financial officer) that exceeds $1 million during the tax year unless it is based upon attaining pre-established performance measures that are set by the Committee pursuant to a plan approved by the Company’s shareholders. The Committee has the flexibility to take any compensation-related actions that it determines are in the best interests of the Company and its shareholders including determining when to request shareholder approval of the Verizon incentive plans and when to award compensation that may not qualify for a tax deduction. The Committee considered the desirability of tax deductibility for performance-based executive compensation in determining to submit Verizon’s Long-Term Plan to the shareholders for approval in 2009.

Compensation paid to the named executive officers under the Short-Term Plan is intended to meet the performance-based exception for deductibility under the tax laws. Any compensation paid with respect to the 2008-2010 and 2009-2011 performance cycles under the Long-Term Plan would not be deductible because at the time the awards were granted, the categories of performance measures under the Long-Term Plan had not been approved by Verizon’s shareholders. Management has advised the Committee that not having a tax deduction for payments (if any) under the Long-Term Plan for these performance cycles is not expected to be material to Verizon’s overall tax liability. With shareholder approval of Verizon’s Long-Term Plan in 2009, the Long-Term Plan once again meets the performance-based exception, and future performance-based awards paid under the Long-Term plan will be deductible until such time as shareholder approval of the Long-Term Plan is once again required.

The Committee also considers the effect of certain accounting rules that apply to the various aspects of the compensation program available to the named executive officers. The Committee reviews potential accounting effects in determining whether its compensation actions are in the best interests of the Company and its shareholders. The Committee has been advised by management that the impact of the variable accounting treatment required for long-term incentive awards that are payable in cash (as opposed to fixed accounting treatment for awards that are payable in shares) will depend on future stock performance.

Stock Ownership Guidelines

To further align the interests of Verizon’s management with those of its shareholders, the Committee has approved guidelines that require each named executive officer and other executives to maintain certain stock ownership levels.

  • The guidelines require the CEO to maintain share ownership equal to at least seven times his base salary and require the other named executive officers to maintain share ownership equal to at least four times their base salaries.
  • The guidelines also prohibit an executive from short-selling or engaging in any financial activity where they would benefit from a decline in Verizon’s stock price.

In determining whether an executive meets the required ownership level, the calculation includes any shares held by the executive directly or through a broker, shares held through the Verizon 401(k) plan or the Verizon nonqualified savings plan and other deferred compensation plans and arrangements that are valued by reference to Verizon’s stock. The calculation does not include any existing or future PSUs and RSUs that are payable in cash or are unvested.

Recovery of Incentive Payments

The Committee believes that it is appropriate that the Company’s compensation plans and agreements provide for financial penalties to an executive who engages in fraudulent or other inappropriate conduct. Accordingly, the Committee has adopted a policy that enables the Company to recapture and cancel certain incentive payments received by an executive who has engaged in financial misconduct. The Committee reviews this policy from time to time and will refine the current policy to take into account changes in applicable law, including, for example, any changes that may be required under the Dodd-Frank Act.

1

For 2010, adjusted net income and adjusted EPS exclude the following items:

 

  • Access line spin-off related charges;
  • Merger integration and acquisition related charges;
  • Severance, pension and benefit charges;
  • Medicare Part D subsidy charge; and
  • Deferred revenue adjustment.

A detailed description of the nature and amount of these items may be found in Verizon’s Current Report on Form 8-K filed with the SEC on January 27, 2011.

2

A reconciliation of free cash flow to cash flow from operations may be found in Verizon’s Current Report on Form 8-K filed with the SEC on January 25, 2011.