Enron Corp. gave $55 million in “retention bonuses” to selected managers two days before filing for bankruptcy protection, but it said it could not provide severance pay to 4,500 laid-off employees, company officials testified yesterday.
Meanwhile, former Enron Chairman Kenneth L. Lay, who received subpoenas from two congressional committees yesterday to testify next week, cultivated a corporate culture that influenced employees to invest heavily in Enron stock despite concerns among the company’s 401(k) retirement fund managers that the funds should be more diversified, the officials said.
“We were the darlings of the business community. Bonuses were routine and accolades commonplace. This created an atmosphere of great pride, trust and respect for the management and Enron’s invincibility. After all, we went from Fortune 17 to seven,” said Deborah G. Perrotta, a former administrative assistant.
At a hearing of the Senate Governmental Affairs Committee, company officials said all Enron employees received stock options and many invested most of their retirement funds in Enron stock out of a kind of “emotional” attachment to the company.
On the verge of tears, Mrs. Perrotta told the Senate panel she lost $40,000 when Enron went bankrupt on Dec. 2 and now could not pay for her daughter’s wedding. But she considers herself “lucky.”
One of thousands of workers laid off at the time of the bankruptcy, she said the workers collectively are owed about $150 million in severance pay. But most received a token $4,500 and were forced to wait in line behind the company’s big bank creditors to try to get a fraction of what they were due from the bankruptcy court.
The impending bankruptcy did not prevent top management from funding hefty bonuses for the executives it chose to retain after the Chapter 11 filing, she said.
The revelation of the lucrative retention bonuses and loss of severance pay, which were confirmed by Enron benefits managers testifying at yesterday’s hearing, provoked an angry reaction from senators, who have sought with little success to get senior Enron executives to explain their actions in testimony on Capitol Hill.
Mr. Lay is expected to invoke the Fifth Amendment right to remain silent when he appears before the Senate Commerce Committee and the House Financial Services Committee next week, as are the company’s former chief financial officer Andrew Fastow and his deputy, Michael Kopper, in testimony scheduled for tomorrow.
“It adds insult to injury. Enron is still a functioning company. Why they can’t find a way to pay the severance really pains me, especially in light of the retention bonuses,” said Sen. Joseph I. Lieberman, Connecticut Democrat and chairman of the governmental affairs panel. He said the committee will issue subpoenas to get to the bottom of the matter.
Mikie Rath, an Enron benefits manager, testified that the company initially thought it could come up with the severance pay, but it was stopped by the company’s attorneys, who cited provisions of the bankruptcy law that put secured creditors like banks ahead of people with unsecured claims like former employees.
“Everybody was devastated by this, but we were told it was the law,” she said.
Ms. Rath also said that, despite the fall in the company’s stock from more than $80 a year ago to less than $1 today, few company employees chose to sell Enron shares out of their 401(k) plans to limit their losses.
In fact, few employees moved to sell their shares in the weeks preceding the 19-day “lockdown” period when the company changed plan administrators, apparently because most were as convinced as Mr. Lay that the failing energy giant would rise again, she said.
The stock was trading at $15.40 just before the lockdown on Oct. 26, and had fallen to $9.98 when it ended Nov. 13, she said.
“We gave employees notice well in advance of the lockdown when news of the problems at Enron” was emerging in September and October, she said. “Nobody knew what was going to happen to the stock. It’s easy to see in hindsight, but if someone had told me Enron would file for bankruptcy, I wouldn’t have believed it,” she said.
“We thought we were going to get out of this. People were actually excited” when Mr. Lay, Enron’s founder, came back to run the company after former chief executive officer Jeffrey Skilling resigned in August, Ms. Rath said. “We were glad to see Mr. Lay back. We thought we were in good hands. He received a standing ovation.”
Cindy Olson, an Enron vice president for human resources, acknowledged having an “emotional” attachment to the company stock like other employees. But she heeded the advice of a financial adviser and sold off $6.5 million in shares a year ago after she was demoted and was considering leaving the company.
Ms. Olson, who said she received a retention bonus of about $20,000, was one of a dozen Enron executives named in lawsuits by Enron employees and investors seeking to recoup losses.
The benefits managers said company employees were given 20 investment options in their 401(k) plans and were routinely cautioned to diversify their holdings in “brown bag” investment seminars provided by the company. But employees were not given access to personal advisers like the one who helped Ms. Olson.
“We gave them a lot of choice which our employees wanted but they didn’t have the information they needed to make a smart choice,” said Ms. Olson.
Ms. Rath said she was concerned about the heavy Enron holdings in the 401(k) plan, but concerns about “liability” prevented her from intervening with individual employees.
She said some company employees believed so much in the corporate success story cultivated by Mr. Lay that 1,400 chose to buy more Enron stock for their 401(k) plans when it fell to 36 cents after the bankruptcy filing.
“That’s an incredible story of the loyalty of the employees,” Mr. Lieberman said. “But it pains me to say it was not returned. The infuriating fact is the company outside your office was giving advice to the employees, telling them to buy stock” while the more responsible advice was muted, he said.
Meanwhile, President Bush yesterday rejected Democrats’ calls for an independent counsel to investigate Enron abuses.
“This is a business problem. And my Justice Department is going to investigate, and if there’s wrongdoing, we’ll hold them accountable for mistreatment of employees and shareholders,” he said.