Only 21% of American private sector workers today are covered by traditional defined benefit (DB) plans, according to the Bureau of Labor Statistics. Most companies have gradually transformed their DB plans in defined contribution (DC) plans such as 401(k)s, shifting the risk of saving and investing for retirement to the employees themselves. The latest examples are IBM, Verizon Wireless, Hewlett-Packard and General Motors.
But there is a category of ‘workers’ who still enjoy DB peace-of-mind: the CEOs of the very same companies. About 80% of Standard & Poor’s 500 companies have Supplemental Executive Retirement Plans, which are schemes widely popular in the US because the Internal Revenue Service caps the amount of income that can be used to calculate regular pension benefits at $220,000 (€172,000).
Like traditional DB plans, these extra benefits are based on executives’ “final average compensation” multiplied by years of service. The trouble is it is extremely difficult to evaluate what that means, because current rules don’t require much disclosure. That’s why retirement benefits for top executives are often called “stealth compensation”. But things are likely to change next year, if the Securities and Exchange Commission (SEC) succeeds in introducing a proposed new regulation that would shed light also on CEOs’ pensions.
An anticipation of what shareholders could be able to discover comes from the AFL-CIO union federation that together with the Corporate Library, a corporate-governance research group, has just published the study ‘CEO Golden Years: The Top 25 Largest CEO Pensions’.
The future retiree with the most generous pension is Pfizer chief executive Hank McKinnell, whose estimated annual check would be $6.5m; the same with the already (recently) retired ExxonMobil CEO Lee Raymond, followed by AT&T CEO Edward Whitacre, with $5.5m. UnitedHealth Group CEO William W McGuire would get “only” $5m per year and IBM CEO Samuel J Palmisano $4m.
Between $3 and $4m is the estimated annual pension of CEOs with Home Depot (Robert L Nardelli), Colgate-Palmolive (Reuben Mark), Comcast (Brian Roberts) and Bank of America (Kenneth D Lewis). Between $2.4-2.7m are the estimates for the other 16 CEOs, including Vance D Coffman (Lockheed Martin), E Neville Isdell (Coca-Cola) and Jeffrey R Immelt (General Electric).
Many of these plans have provisions that allow a CEO to cash huge lump sums instead of the yearly pension, even before retirement age. For example, Pfizer CEO McKinnell could take a lump-sum of $8m, which is based not only on cash compensation,
but also on bonuses, long-term incentive plan payouts, restricted stock awards granted on or prior to 26 April 2001, and any additional “performance-contingent share awards” granted for performance periods beginning before 1 January, 2001.
At the US drugmaker’s annual shareholder meeting at the end of April, the AFL-CIO union attacked McKinnell’s “super-pension”, calling it “pay for pulse” policy that did not reflect performance, because under his leadership Pfizer’s stock price underperformed for the last five years, losing nearly half value between 2000 and 2005.
However AFL-CIO failed to put a resolution on Pfizer’s shareholder proxy ballot that would make shareholders vote on pensions worth more than senior management’s annual compensation. Pfizer spokesman Paul Fitzhenry replied that “McKinnell has earned his pension benefits (over) 37 years of service to Pfizer as of the time of his retirement” and that Pfizer produced “outstanding shareholder returns” over several of those years.
Also in the line of AFL-CIO’s fire is Palmisano: “Under his leadership IBM has twice slashed pensions for its workers, in 2006 and 1999, but each time Palmisano was grandfathered out of the changes. He will be taking home about $75,000 a week in retirement, while future IBM workers will have no defined benefit pension”. “IBM is a case study in pension disparity,” concludes the AFL-CIO study.
A notable recent exception has been recently General Motors: when last March the troubled automaker announced freezing pension benefits for 36,000 US employees and moving toward DC plans, it also meant freezing benefits earned by company executives who participate in the Supplemental Executive Retirement Plan. As of 2007, the SEC may require a full disclosure on CEOs’ pensions available to everybody.