Finance Committee on June 18th, 2009

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Kramp, please.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Mr. Chair.

Welcome, Mr. Zafirovski and Mr. Tay.

Obviously, Nortel has a significant impact on this region and many regions across the country. I'm from the Belleville, Quinte region. Nortel has had a long and storied history there, so I can assure you that I've heard from many of the retirees, pensioners, and of course former executives of Nortel.

There's isn't a person around this table who doesn't realize that the best pension guarantee that exists, of course, is a successful and profitable company. But we also understand that when difficulties do occur, pension guarantees do fall under the responsibility of the provinces. People ask if the federal government is off the hook, and I say, quite frankly, no, we have responsibilities as well. I think we, as federal legislators, have a responsibility to provide a regulatory environment that serves the best interests of both corporate and employee groups. Our purpose here today is to listen to the various perspectives, to see if we can come forward and deal with potential legislation and/or enforcement and/or guidance that we could provide that would be of benefit to both groups going forward.

As we travel through this difficult period, I personally--and a number of my colleagues and certainly my constituents from Belleville and many in the Ottawa capital region I've had direct contact with, and my colleagues as well--believe that more clarity is needed. The rumour mill reigns supreme on a little bit of everything, but when people are directly affected personally we really have to get to the very bottom of it to make an intelligent decision.

While Nortel was seriously reducing or in many cases eliminating pension benefits, I'd like to know.... I have three or four quick questions, and maybe you can give me a true or false to them, if you wish, and then we can move on rather quickly.

In the current job market--it's a tight job market out there--do you really believe it was necessary to offer large bonuses, given this market, simply to retain the people you have?

[Mike S. Zafirovski]

Yes.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

You do. Fine.

Were any other incentives not considered, other than bonuses? If so, what were they?

[Mike S. Zafirovski]

I actually want to make sure that when we discuss the bonuses, sir, we understand that this is part of a compensation program that is very typical in the high-tech industry. A secretary, for example, used to make $40,000. Typically, if you are an industrial company, you pay the full $40,000 as a base salary. In the high-tech industry, you may pay $36,000 and then 10% as an “annual bonus.” I do think it's very important, but this is true for all employees. The annual incentive plan is not a bonus per se; it's part of your compensation for a job personally well done.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

It's still dollars received, whether it's bonus or whether it's salary. My consideration is we are not in normal everyday times. We are not in business as usual times.

Is it fair to expect, when people are hurting very badly, to see other people stand up--and I don't wish to use the words “at the trough”, because I think that would be unfair.... But when you share the gain, you should also share the pain. Has there been any consideration within the company or discussion that suggested potentially part of this benefit plan and/or bonus plan should be dropped?

[Mike S. Zafirovski]

Sir, the discussions have been what can we do to pay severance. We're absolutely convinced that paying the annual incentive plan and the retention is critical to preserve value within Nortel. That's based on any good practice that has happened in this country and many countries all over the world. Discussions were not either/or, but what we can do to in fact pay severance to employees. That's why, with all the arguments--and the board, myself, and Mr. Tay can attest to many late-night discussions on it--the view was that per the jurisdictions in Canada, and given the fact that severance payments to former employees carry the same weight as any other liability, the judge, for financial perspectives, would not be approve that request to pay severance.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

I noticed that on March 2 Nortel--not the individual court, but Nortel--filed the motion in court to pay retention bonuses of $7.3 million simply to eight key senior executives alone among many other what I would call financial programs to administer wages. What portion of that is bonus? What portion of that is considered salary?

[Mike S. Zafirovski]

For the retention plans in specific, for all 980 employees, including the eight executives you mentioned, it's a very specific retention plan. This is new. That's for this year. It's a very volatile situation to be able to retain and motivate employees, to be able to stabilize the company, to optimize the value for it. Many things have been forgone, including equity plans. In the change in control plans we've eliminated many benefits, but this is a special plan for 2009 to be able to allow the company to survive. I chose not to be in those.

[The Chair, Conservative, James Rajotte]

One minute, Mr. Kramp.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

I think we can certainly understand the anger and the angst, though, when people are faced with what they felt was a very positive, predictable future and they see that dramatically cut and curtailed and yet they still see a bonus process in place. We understand that you have to offer incentives to try to attract quality people, but there just does appear to be a bit of a contradiction at this particular point when there doesn't appear to be a sense of balance and fairness, and that has been demonstrated by many people throughout the company. When I take a look at--

[The Chair, Conservative, James Rajotte]

Do you have a question?

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Okay, question. I have a statement from yourself as CEO basically standing up for the code and principles, and the code of business conduct, that Nortel Canada should.... Do you feel you and the company are honouring this code of conduct?

[The Chair, Conservative, James Rajotte]

Very briefly, sir.

[Mike S. Zafirovski]

The short answer is yes. When you file for credit protection, that means you have many real liabilities, whether it is to a supplier, to an employee, to a bond holder. The unfortunate realization at that point in time is that you cannot fulfill all your obligations. That's why you file for credit protection. From that perspective, the short answer is yes. I do want to re-stress the point in regard to making severance payments that we made a very painful decision and we really did not believe there were any other options but to take that course of action.

[The Chair, Conservative, James Rajotte]

Oaky, thank you.

Monsieur Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chair.

Mr. Zafirovski, good morning.

In your presentation, you explain to us how painful it was for you, and these are your exact words: “difficult and agonizing”, and you explained your “empathy”. Those are all your words.

Given that, I would ask if you would be so kind as to stay for the next hour so that you can hear from all these people who are actually suffering the pain that you say you have.

[Voices]

Hear, hear!

[The Chair, Conservative, James Rajotte]

Order. I would ask the crowd to please respect Mr. Mulcair's time.

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Zafirovski, my first substantive question is the following: you went before the courts to ask for an additional $45 million to pay retention bonuses to your executives. In response to a question, according to the legal opinion you would have received, there was no point in asking for money to pay severances, because you already knew ahead of time that the courts would say no.

How does that work exactly? How did you know in advance that the courts would give you and the other executives $45 million, and without even trying, and presume that they would deny money to pay severances?

[Mike S. Zafirovski]

The approach internally on continuing to fulfill obligations to existing employees in the retention plan, based on studies of companies all over the world, we thought was the absolute minimum requirement. Creditors, who have the same expectations as employees, and would like to optimize what the company owes them, also believed that they were very much in active discussions about the right things to do to be able to have the proceeds to fulfill the greatest percentage of previous obligations.

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Zafirovski, are you going to stay for the second hour? I have places right here for you and Mr. Tay if you'd like to hear from the people. Mr. Pacetti was right. The order was decided by the chair. That's fine. But they are here, and it will take you one hour to hear from them. I think that would be useful, given the fact that you've described how painful this has been for you. This might be a way for you to expiate some of that pain. I'm inviting you to stay here for another hour, if that's possible.

[Mike S. Zafirovski]

I'm sure I will consider that. I've spoken to many employees and still continue to speak to many current and former employees.

[Thomas Mulcair, NDP, Outremont, QC]

Would you like to listen to them instead of speaking to them? Would you like to listen to them?

[Mike S. Zafirovski]

The speaking comment was a combination of listening and speaking. I will consider that. Thank you.