The reward for failure went up by $32 million this past week.

That's what Dynegy agreed to pay its two former top executives, Chairman Chuck Watson and President Steve Bergstrom, to make them go away.

Watson was ousted by Dynegy's board in May 2002, and he'd been demanding $28.7 million in severance, which he claimed was justified by his employment contract.

Dynegy grudgingly settled with Watson for $22 million, fearing that he might prevail because a similar dispute with Bergstrom had gone badly for the company.

In April, an arbitration panel gave Bergstrom, who left the company in October 2002, every penny of the $10.4 million he was demanding. Bergstrom's victory set the stage for Watson's $22 million windfall.

By some accounts, Watson was ginning up an argument that he deserved as much as $67 million, and the company, fearing an arbitration panel might agree as they did with Bergstrom, decided to settle.

Former Chief Executive Rob Doty is next in line at the trough. His claims for $3.4 million are set for arbitration in November. In documents filed with the Securities and Exchange Commission, Dynegy says it doesn't think he's entitled to that much.

Dynegy has argued both in public filings and interviews that the severance clause in the executives' contract doesn't apply when they depart in disgrace.

Sham trades
   
That Watson could justify any payment at all is laughable.

On his watch, and on Bergstrom's and on Doty's, Dynegy recorded false electricity trades over its DynegyDirect system, which drove up the volumes it claimed to have traded. The inflated trading volume was reported to shareholders, giving the impression that the trading operation was doing a stronger business than it actually was.

It was good old-fashioned market manipulation, defined in large part by Enron and copied by Dynegy, which in the heady days of the energy trading boom had a severe case of Enron envy.

It didn't stop with wash trades.

Dynegy also ran an operation called Project Alpha, which disguised $300 million in financing as natural gas trades. In other words, loans that should have been recorded as debt, instead were booked as trading revenue. That, too, was a page from Enron's playbook.

It paid $3 million to the SEC in September 2002 to settle an investigation into the sham trades.

Brink of bankruptcy
  
The so-called leadership under Watson and Bergstrom took Dynegy to the brink of bankruptcy. By the end of 2002, the company had suspended its dividend. Its bonds were trading at 20 cents on the dollar and its shares were selling for as little as 49 cents. Its market value, which had been more than $18 billion at the end of 2000, plunged to less than $440 million.

Since then, the company has sold off divisions, including most of its trading operations, and its employee base has shrunk to 4,100 people from almost 5,800 at the end of 2000.

From its dismal position at the end of 2002, though, Dynegy has clawed its way back from the abyss. And therein lies the irony. The company could have filed for bankruptcy, and if it had, Watson, Bergstrom and Doty would have been just three more unsecured creditors, waiting in a long line to get pennies for every dollar they claimed to be owed.

Instead, the company fought off failure. It rebuilt itself, restructuring its operations around power plants, natural gas processing and pipelines and 38,000 miles of electricity transmission lines. It is a company built on hard assets of the kind it once shunned as an Enron wannabe. Its stock has bounced back to about $4 a share.

Predatory nature
  
And now the architects of the company's problems are profiting from the hard work of those who cleaned up their mess.

The predatory nature of the severance demands can't be overstated. Even Ken Lay, departing Enron in shame, had the decency to waive any severance claims.

Watson's award makes him the highest paid executive in Houston this year, leaping ahead of Archie Dunham at ConocoPhillips. Dunham made $16.8 million last year. Not only did his company not founder, it's thrived. Dunham got a big bonus — earning $40 million — in 2002 for orchestrating the merger of Conoco and Phillips Petroleum. It's worth noting that the shares of the combined company have risen 44 percent since they merged.

Dynegy's current CEO, Bruce Williamson, declined to talk about the payments to Watson and Bergstrom. Clearly, he wants to put the matter behind the company, to shake loose of one of the last vestiges of its sordid past.

That is the type of dispassionate decision that businesses sometimes have to make. Unlike Watson, he's putting the needs of the company's employees and shareholders ahead of whatever personal feelings he may
have.

Watson has a new energy company and an ownership stake in the Texans. I don't begrudge him the chance to start over, but he doesn't deserve to profit so handsomely from his past failure.

Watson and his cronies obviously have an elevated opinion of the value they contributed to a company they almost ruined. Their calculations are off by about $32 million.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com.