CEO Pensions: The Latest Way to Hide Millions
Think CEO pay is out of control? Wait till you see what these guys get when they retire.
FORTUNE
fortune.com
For a brief, shining moment, it looked as if
outrage had finally triumphed over excess.
Earlier this month, soon after Delta Air Lines
disclosed that CEO Leo Mullin had hauled in
a bonus of $1.4 million plus $2 million in free
stock in 2002, howls of protest from
shareholders and employees prompted a
dramatic turnabout. After all, in 2002 the
airline had lost $1.3 billion, slashed
thousands of jobs, and seen its stock price
collapse by 58%. Mullin announced that he
was voluntarily slicing his $795,000 salary by
25%, giving up the opportunity to receive a
bonus in 2003, and forfeiting another $2.4
million in retention payments due him over
the next two years. "In the current
circumstances," he said in a memorandum
to Delta employees, "the steps I am taking
feel right to me."
What apparently didn't feel right to Mullin was
the notion of trimming his huge pension--a
pension that, by the way, he mostly didn't
earn. You see, Mullin has been employed by
the airline for only five years and eight
months. But a special pension plan that
Delta's board created for top executives has
credited him--shazam!--with another 22 years
of service. Thanks to those phantom years,
the 60-year-old CEO could walk away from
the airline today and be entitled to receive a
payout of about $1 million a year, starting at
age 65, for the rest of his life. And if the airline
goes bankrupt, no problem: Special
Delta-funded trusts protect the pensions of
Mullin and 32 fellow executives from
creditors. "During these very difficult times in
the industry, the board decided that they
needed to do something to retain qualified
executives," explains a Delta spokesperson.
That level of concern doesn't extend beyond Delta's executive suite.
Declaring that its retirement expenses were increasing at an
"unsustainable rate," the company announced in November that it was
phasing out the traditional pension plan for its 56,000 nonunion workers
and replacing it with a less costly version, known as a cash balance plan.
Benefits experts say the switch could shrink the expected pensions of
older workers by as much as half. The typical pension payout of a
50-year-old flight attendant with 20 years of service, for instance, could
easily plunge to $15,000 a year.
Witness the latest--and quite possibly the greatest--double standard in
the world of compensation. At the same time big companies are taking an
ax to the traditional pension plans of the rank and file, they are funneling
millions of dollars into what's fast becoming the ultimate
pay-for-nonperformance vehicle: the executive pension plan. In this
magical land, years are transformed into decades, and the term
"shareholder value" doesn't apply.
And don't think pensions are bit players in the grand scheme of executive
pay: Using the most conservative actuarial assumptions, the
$4.5-million-a-year pension that former Tyco CEO Dennis Kozlowski is
now attempting to collect is worth some $50 million in today's dollars.
That's $50 million belonging to current Tyco shareholders.
So why, you may wonder, aren't investors up in arms over these
jaw-dropping retirement giveaways? The answer is that hardly anybody
knows about them. The complex details surrounding executive pensions
are typically buried deep within a company's SEC filings, far removed from
the salaries, bonuses, and stock options that dominate the headlines. "It's
stealth compensation," declares executive-pay expert Graef Crystal.
Blame the SERP. A SERP (supplemental executive-retirement plan) is a
steroid-enhanced version of the traditional defined-benefit pension plan,
in which a company sets aside a given percentage of an employee's pay
every year to produce a guaranteed payout. SERPs are now offered by
about half of all big publicly traded companies, usually only to the CEO
and the next dozen or so officers. And while the combination of a
collapsing stock market and low interest rates have placed pension plans
for ordinary Joes in jeopardy--about 40% of big companies that offer
company pension plans are now seriously considering cutting benefits,
according to a recent survey by accounting firm Deloitte & Touche--that's
not the case for top execs. In fact, now that the stock market bubble has
burst, compensation experts predict that companies will actually increase
their use of SERPs to pick up the slack. "A lot of companies that relied on
stock options and equity to provide wealth accumulation are beginning to
look for other ways to round out the program," says Ann Costelloe, a
senior consultant in the executive-compensation practice of benefits firm
Watson Wyatt.
Here's the kicker: SERPs aren't subject to the
same restrictions that govern tax-qualified
retirement schemes, so corporate boards
have free rein to use them to deliver virtually
any amount of money to an executive at any
time--even if he's on his way out the door.
Consider Terrence Murray, who stepped
down as CEO of FleetBoston in 2001. Murray
had worked at the company for 39 years, and
he had already racked up a
$2.7-million-a-year pension under his
existing SERP. Just months before he retired
as CEO, the board amended his plan to
include not only salary and bonus toward his
pension-eligible compensation but also the
value of stock options he had exercised. That
flick of the pen boosted Murray's pension to a
staggering $5.8 million a year. According to
the company's proxy filing, the board's
largess was prompted partly to reward
Murray for his long track record of success
but also by a "review of market practices in
this area."
Ah, yes: keeping up with "market practices."
Thanks in part to that inexorable force, what
Delta did--add years of unearned service to a
top exec's pension plan--has become
routine. CEOs at scores of companies,
including Mike Armstrong at AT&T, Larry
Weinbach at Unisys, and Jeff Barbakow at
Tenet Healthcare, managed to get the
equivalent of years--sometimes decades--of
service tacked onto their pensions. Many
companies argue that they offer this
sweetener to "make whole" a new executive
who has accumulated several years of
service in his old company's pension plan.
But the practice makes a mockery of what
pensions are designed to do: reward loyalty. And the shareholders of the
companies who hire job-hopping CEOs are left holding the bag.
Not that shareholders are likely to know the true extent of the damage.
Companies aren't required to break out the amount they spend on
executive pensions in their financial reports. "Companies are just
throwing extra money at these top people, and there seems to be no valid
explanation why," says Peter Clapman, chief counsel for the $250 billion
institutional money manager TIAA-CREF.
Nevertheless, corporate boards seemingly stop at no expense to protect
the pensions of their top guns--even as their companies careen toward
financial ruin. Scores of big companies, including Motorola, Advanced
Micro Devices, and Altria (formerly Philip Morris), have set up special
pension trusts similar to Delta's to protect executive nest eggs in the event
of bankruptcy. For shareholders, the arrangements carry a big pricetag.
That's because when a company puts money into one of the trusts, the
executive on the receiving end is taxed. So the company shells out even
more money to pay the IRS tab. For instance, when Delta deposited $4.5
million into Mullin's pension trust, it also gave him $3.7 million in tax
"gross-up" payments.
Airlines are the biggest offenders. UAL (the parent of United Airlines), for
instance, plowed $4.5 million into a pension trust last September for its
new CEO, Glenn Tilton, just three months before the airline filed for
Chapter 11. At US Airways, Stephen Wolf took his pension in a lump sum
of $15 million when he stepped down in March 2002, just six months
before the company filed for Chapter 11. (That $15 million included 24
years of service Wolf never performed.) "While thousands of pilots will
retire with only a fraction of the pension benefits they earned and
expected, airline executives can look forward to retirement knowing that
their nest eggs are solid gold," says captain Duane Woerth, president of
the Air Line Pilots Association.
Jacked-up executive pensions present yet another danger for the
shareholders of any company that offers them: Those guaranteed
seven-figure payouts bear absolutely no relation to performance. The only
real requirement of the executives who receive SERPs is that they stick
around for a while--typically five years or less. Often they don't even have to
do that. That's because virtually all employment contracts negotiated by
top executives contain clauses that entitle them to receive their pensions
in full if they are terminated at any time "without cause."
Hence the $1.6-million-a-year pension being collected by Richard Brown,
former chairman and CEO of EDS. He was booted from the company in
March after four tumultuous years in which the stock price fell by 62%.
Under the terms of his employment contract, Brown would get an
additional 16 years of service for pension purposes after he had put in five
years' service. But since he was terminated "without cause," he got
credited for the 16 years anyway. "He was a much sought-after executive
back in 1998, so we had to offer a very competitive package," says Jeff
Baum, an EDS spokesperson.
The ever-growing disparity between the retirement nest eggs being built
up by executives and by rank-and-file employees is perhaps best
personified by John Snow. He stepped down as CEO of CSX in January to
become the Bush administration's new Treasury Secretary. Now he is set
to rule on a set of pension regulations proposed by the Bushies that
would let companies convert their traditional pension plans to the "cash
balance" version--the kind that can cut the pensions of older workers by
50%. Meanwhile, he received an extra 19 years of service that he never
performed, then cashed out his pension as a lump sum of $33 million.
"John Snow's pension benefits are consistent with executives' at
FORTUNE 500 companies," says a CSX spokesperson.
And that, of course, is exactly the problem. |
