boosted his pension by $10.5 million.) At the end of that same year, Goodyear froze salaried employees’ pensions, saying its obligations under the plans were so onerous that they “could impair our ability to achieve or sustain future profitability.”
Joel Gemunder, the CEO of Omnicare, a provider of pharmaceutical care for nursing homes, had amassed retirement benefits worth roughly $91 million by the time he retired at age seventy-one in 2010. As lofty as that figure was, it got even bigger when he left. His retirement triggered immediate vesting for his stock options and restricted shares, which were worth more than $21 million, and he received $16.2 million in cash as a severance payment. Small perks included payments for tax and financial planning ($134,250) and “executive bookkeeping services” ($27,500). Altogether, the total retirement payout was more than $130 million. And ordinary Omnicare workers? Their pensions were frozen years ago, and in 2009 the company imposed salary cuts even as it reported record profits.
The pension and deferred-comp tables included in annual proxy statements provide a limited snapshot of the value of a top manager’s benefits. But these amounts aren’t what the person is likely to receive. Those numbers are tucked away lower down, under various provisions, such as “voluntary retirement” or “disability.” If someone relied on the pension table in Wells Fargo’s proxy statement, they might conclude that president John Stumpf’s pension in 2008 was $9.6 million, a 3 percent decline from the prior year. But elsewhere, the filing notes that the value of the pension he would receive if he left spiked to $17.7 million from $11.2 million—a 58 percent increase.
The biggest trigger of a huge pension boost can be a change in control. Scott Ford, president and chief executive of Alltel Corp., had accumulated a pension of $16.8 million through 2007. But after the company was acquired by Verizon, change-in-control provisions tripled Ford’s salary and awarded three additional years of service. He left the company in 2008 with a pension payment of $51.7 million. Altogether, the five departing top executives received pension payouts of $131 million.
Despite their limitations, the executive pension tables in the proxy are better than nothing. In the S&P 500, 160 companies don’t have the kinds of retirement benefits that they are required to disclose in the proxies’ pension tables. This doesn’t mean that those executives receive no retirement benefits, just that the companies characterize the benefits as something other than a pension, so the benefits don’t fall under the enhanced SEC disclosure rules that companies were required to adopt in 2007. These require companies to place an overall value on their executives’ pension benefits.
Omnicom, for example, established a Senior Executive Restricted Covenant & Retention Plan in 2006 to provide top executives at the global advertising giant with an annual payment, based on salary and years of service, for fifteen years after they depart. John Wren, the company’s chief executive, will receive $1.3 million a year for fifteen years. The retirement payments will grow with a cost-of-living adjustment, a feature that most companies have discontinued in the pensions for regular employees. The liability for this? Anyone’s guess.
Some companies even give the impression that they’ve cut executive retirement benefits. Companies that freeze their regular pension plans sometimes freeze their executive pensions, too, especially when the plan is a so- called makeup, or excess, plan that mirrors the regular 401(k) but allows greater deferrals. But companies may take steps to soften or eliminate the impact. State Street Corp. froze its executive pensions effective January 1, 2008, but awarded executives “transition” benefits that postponed the freeze for two years. Thanks to this feature, and a drop in interest rates and other factors, their pensions rose 47 percent in 2008, and CEO Ronald Logue’s pensions (like most top executives, he has more than one) rose by $7.8 million to $25.3 million. The company also added a retirement savings component to the plan and will contribute $400,000 a year in cash and stock to each executive’s account.
Lincoln National Corp. also froze both its regular and executive pensions in 2008. When it did, it converted the executive pensions to lump sums, enhanced their value by $6.3 million, and added the benefits to a new deferred-compensation plan, to which the company will contribute a minimum of 15 percent of the executives’ total compensation each year. That year, it contributed $12.3 million to the new account for CEO Dennis Glass. The company didn’t enhance the 401(k) plans of regular employees whose pensions it froze.
One thing people can count on: Unlike the pensions of regular employees, executive liabilities aren’t going away. They’re protected by contracts. Though lower-level executives can lose their deferred comp in bankruptcy, the pensions and savings of top officers are usually protected by bankruptcy-proof trusts. Chesapeake Energy, the secondlargest natural gas producer in the United States, doesn’t disclose the total amount it owes executives, but it’s no doubt a hefty sum. Aubrey K. McClendon, the chief executive, had compensation that totaled $156 million in the last three years. He’s also owed $120 million in pension and deferred-compensation benefits. In its annual report, Chesapeake needs thirty-four pages to describe its executives’ retirement benefits. The benefits for 8,200 employees require only half a page to describe—they don’t have pensions.
DEFERRED GRATIFICATION
Pensions aren’t the only executive liability. So is much of their pay. Unlike salary paid out to factory workers or the CFO, deferred compensation creates huge, and largely hidden, obligations. The plans can cover thousands of lower-level executives and other highly compensated employees, who participate in so-called excess plans. These enable employees to defer some of their salary that they can’t put into the 401(k) because of tax laws that limit total employee contributions to $15,000. So if a 401(k) allows employees to contribute 15 percent of pay, someone making $200,000 will be allowed to contribute only a total of $15,000 to the 401(k), and can defer the rest in the excess plan.
These are also called mirror plans, because they “mirror” the 401(k). The only difference is that the amount deferred into the excess plan isn’t actual cash, as it is with a 401(k), but an IOU from the company for the pay. Nonetheless, the employee allocates it among virtual mutual funds—usually the ones available in the 401(k)—and may also receive virtual employer contributions.
Upper-level executives often have more elite deferred-compensation plans that enable them to defer upward of 100 percent of their salary and bonuses each year, and sometimes restricted stock or the gains from exercising stock options.
The deferred pay can grow quickly. Companies might contribute a percentage of what the executive defers or make an outright contribution, no strings attached. The savings grow with returns pegged to investment, or with guaranteed returns—as high as 14 percent at GE. The accounts also grow with company contributions, such as the 20 percent match that drug giant Wyeth provides its top executives. John Stafford, the former chairman, one year collected $3.8 million in interest alone on his deferred-compensation account, valued at nearly $38 million. Together, the value of the company contributions and tax-deferred returns can boost the value of the pay by 40 percent.
Companies are required to report only guaranteed above-market interest paid annually into the accounts of the five highest-paid executives, and include the size of each individual’s accounts in a separate table. But the total amount of all the deferred compensation of hundreds of executives is typically hidden.
Totting up the total amount a company owes its executives can take some creativity. One way to get a sense of their size is to look at a reporting item called a “deferred tax asset.” Companies can deduct compensation they pay, but only when they actually fork over the money (or put money into the pension or 401(k) plan).
When compensation is deferred, companies record a deferred tax asset for the compensation, which is essentially an estimate of how much the company will be able to deduct in the future—when it actually pays executives what it owes them. JPMorgan Chase, for instance, reported a $3.4 billion deferred tax asset for employee benefits in 2007. Assuming a 40 percent combined federal and state tax rate—and backing out obligations for retiree health and other items—this indicates that the financial giant owed its executives $8.2 billion just before the market crisis. Applying the same technique to Citigroup yields roughly a $5 billion IOU, primarily for restricted stock shares of executives and eligible employees. Fannie Mae had a liability of roughly $500 million for executive pensions and deferred compensation at the end of 2007, judging by the size of its deferred tax assets. The liability remained even as the troubled company was placed into conservatorship.
