NOTICE ********************************************************* NOTICE ********************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file how2ftp. File how2ftp (.txt & .wp) is in directory /pub/Bureaus/Miscellaneous/Public_Notices/ ***************************************************************** ******** I. Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 FCC 96-33 In the Matter of) ) Consideration of NECA's ) AAD 95-34 Incentive Compensation Plan ) MEMORANDUM OPINION AND ORDER Adopted: January 29, 1996; Released: February 5, 1996 By the Commission: I. INTRODUCTION 1. On August 11, 1995, the National Exchange Carrier Association, Inc. ("NECA"), filed its response to the Commission's Order to Show Cause ("NECA Show Cause Order") in this proceeding. In the NECA Show Cause Order, we ordered NECA to show cause why we should not require it to amend its incentive compensation plans to eliminate any provision tying incentive compensation to common line ("CL") or traffic sensitive ("TS") access tariff pool earnings or any incentive, including provisions that provide for discretionary incentive compensation awards, that could otherwise induce NECA officers or employees to violate the Commission's rules. In response to the NECA Show Cause Order, NECA amended its plan to eliminate each provision that might have those effects. We therefore find that NECA's plans require no further amendments and terminate this proceeding. II. BACKGROUND 2. In the early 1980s, the Commission established NECA, an association of local exchange carriers ("LECs"), to administer the interstate access tariff and revenue distribution processes. NECA currently administers the CL and TS pools, the universal service fund, the lifeline assistance program, the long-term support program, and telecommunications relay services. Our rules require LECs to report revenue, cost, and demand data to NECA so that NECA can administer these programs in accordance with our requirements. 3. In 1989 and 1990, the Common Carrier Bureau ("Bureau") audited certain data that the Bell Operating Companies ("BOCs") had reported to NECA's CL pool during late 1988 and early 1989. This audit revealed that several NECA directors had apparently participated in an attempt to influence improperly the 1988 CL pool earnings by inducing certain BOCs to report data to NECA that were inconsistent with our accounting, separations, and access charge rules. In a November 9, 1990, letter to NECA, we expressed concern regarding the this apparent misconduct. In the NECA Show Cause Order, we stated that one effect of this apparent misconduct may have been that bonuses paid to NECA's officers and employees under its incentive compensation plan were larger than they otherwise would have been. 4. That incentive compensation plan had provided for an annual amount of compensation, above regular base salary, that depended upon the achievement of certain predetermined performance objectives. While it originally applied only to vice presidents and staff directors, by 1988 and 1989, when the objectionable conduct apparently occurred, the plan covered all NECA officers and employees. Under that plan, NECA had based as much as fifty percent of the total annual incentive compensation on NECA's obtaining--or exceeding--NECA's authorized rates of return for the CL and TS pools. NECA subsequently revised this annual incentive compensation plan, again covering all officers and employees, and also introduced a three-year, long-term plan for a limited group of NECA's officers. These new plans became effective in 1992. 5. Despite these changes, NECA continued to tie a significant percentage of incentive compensation under its annual and long-term plans to pool earnings. For example, NECA's annual plan based twenty-five percent of incentive compensation on pool earnings; another twenty-five percent was left to the discretion of the NECA Board of Directors' Compensation Committee. In the NECA Show Cause Order, we expressed concern about these features of the annual incentive compensation plan and noted that the plan failed to set any criteria for the Committee to use in determining discretionary awards. Under NECA's long-term plan, forty percent of the incentive compensation depended on criteria that included pool earnings and award of an additional twenty percent was left to the Committee's discretion. The sole criterion for discretionary awards stated in the long-term plan was "[o]ther significant long- term accomplishments." We therefore ordered NECA to show cause why the Commission should not require NECA "to amend its incentive compensation plan to eliminate any incentive that was based upon common line or traffic sensitive pool earnings or that might otherwise induce NECA officers or employees to violate Commission requirements." On August 11, 1995, NECA filed its response to that Order, which presented proposed incentive compensation plans differing markedly from the prior plans. We discuss these proposed plans below. III. DISCUSSION 6. NECA's proposed annual and long-term incentive compensation plans address all the concerns we expressed in the NECA Show Cause Order. NECA's proposed long-term plan no longer ties incentive compensation to CL or TS pool earnings. Its annual plan significantly reduces the emphasis on pool earnings. Both plans now explicitly reward compliance with our rules. NECA has specifically excluded from both plans any consideration of CL or TS pool earnings in determining eligibility for receiving discretionary incentive compensation awards. Neither plan contains any other incentive for NECA officers or employees to manipulate data or otherwise violate our rules. A. Incentive Compensation Tied to CL or TS Pool Earnings 7. As with NECA's former incentive compensation plans, incentive compensation under the proposed plans depends upon the achievement of certain predetermined performance objectives. In the NECA Show Cause Order, we expressed concern that the old plans' performance objectives related to CL and TS pool earnings might encourage rule violations. NECA has removed all such objectives from its long-term plan. The proposed annual plan replaces those prior objectives with an objective entitled "Ensure accuracy of tariff filing processes in compliance with FCC rules." This objective would in part reward performance on the basis of the accuracy of tariff projections for the following items: total company net investment; total company expenses and other taxes; percentage of total company net investment and expenses assigned interstate; and total average schedule settlements. NECA would measure that accuracy by comparing projected and actual results for each of these cost categories. NECA states that this objective would promote "accuracy in the ratemaking process by emphasizing the individual work functions that NECA is responsible for in its mandated role as tariff filing agent for its pool participants." NECA argues that its officers and employees have little influence over the actual results of these items for its large and diverse group of pool participants. 8. One of NECA's core functions is to file CL and TS tariffs that accurately project the costs pool participants will incur in providing CL and TS services. Although the criteria NECA proposes to use to measure the accuracy of its projections also determine pool earnings, NECA's proposed annual plan reduces its emphasis on pool earnings and explicitly rewards compliance with the Commission's rules. Pool earnings criteria now account for a significantly lower percentage of annual incentive compensation than under the former plans. Under the proposed annual plan, eligible employees can receive a maximum of 7.5 percent of their annual incentive compensation based on these pool earnings criteria. The amount of incentive compensation that officers and employees will receive under these criteria depends on the accuracy of the forecast data--the smaller the variance, the larger the incentive compensation. The proposed plan discourages attempts to manipulate these criteria by penalizing any such attempts. Any variance of 3.5 percent or greater produces no incentive compensation under this portion of the proposed plan. In these circumstances, we find that the short term plan's incentives for accurate tariff projections are highly unlikely to induce any NECA officers or employees to violate our rules. B. Discretionary Incentive Compensation Awards 9. In the NECA Show Cause Order, we also expressed concern about the lack of specified criteria for determining eligibility to receive discretionary incentive awards under both NECA's annual and long-term plans. As a result, NECA has modified the discretionary portions of its incentive compensation plans by stating in both plans that "[e]arnings results will not be considered . . . [and] failure to ensure rules compliance will be penalized." NECA argues that, taken together with the plans' other components that base incentive compensation on rules compliance, an officer or employee has more to lose than to gain from any contemplated rule violation. We agree and therefore find that the discretionary portions of both plans satisfy our concerns by specifically excluding any consideration of CL or TS pool earnings and by penalizing rule violations. C. Other Matters 10. NECA states that it "will ensure that any changes made in future versions of its incentive pay plans do not include any pool earnings components or any other incentive which could encourage violations of Commission rules." To enable us to verify NECA's compliance with this commitment, we direct NECA to file with the Commission any change to its incentive compensation plans at least sixty days prior to the change's effective date. IV. ORDERING CLAUSES 11. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 4(j), 201-205, 218- 220 and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 154(j), 201-205, 218-220 and 403, and Section 1.92(d) of the Commission's rules, 47 C.F.R.  1.92(d), that NECA NEED NOT FURTHER AMEND its incentive compensation plans at this time. 12. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 4(j), 201-205, 218-220 and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 154(j), 201-205, 218-220 and 403, and Section 1.92(d) of the Commission's rules, 47 C.F.R.  1.92(d), that NECA SHALL FILE with the Commission any change to its incentive compensation plans at least sixty days prior to the effective date of that change. 13. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 4(j), 201-205, 218-220 and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 154(j), 201-205, 218-220 and 403, and Section 1.92(d) of the Commission's rules, 47 C.F.R.  1.92(d), that this proceeding IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary