The Advisors' Blog

– Jim McRitchie, CorpGov.net

The GAO’s report, “Private Pensions: Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 million in Compensation Shortly Before Termination,” found that 40 executives for 10 companies received approximately $350 million in pay and other compensation in the years leading up to the termination of their companies’ underfunded pension plans. GAO identified salaries, bonuses, and benefits provided to small groups of high-ranking executives at these companies during the 5 years leading up to the termination of their pension plans. For example, beyond the tens of millions in base salaries received, GAO found that executives also received millions of dollars in stock awards, income tax reimbursements, retention bonuses, severance packages, and supplemental executive-only retirement plans.

The Corporate Library Blog (I’ve got my pension but you can go sing for yours, 12/16/09) writes:

Now it would seem to me that any company with even a partially underfunded pension plan for its workers should immediately freeze any executive pension benefits until the plan is in the black, but that sounds like a really effective way to incentivize executives to fiddle the books in a massive way, so the oversight of such legislation would have to be incredibly effective.

On the other hand, most executive retirement packages – certainly defined benefit ones – are a complete waste of shareholder resources because once you are in a position to be eligible for such a plan, you are also in a position to be eligible for enough stock awards to fund your retirement without a pension.

Why do companies bother to keep SERPs? Bebchuk & Fried’s “Pay without Performance” pointed out that while qualified pension plans (exempt from taxation) are limited to about $200,000 a year, supplemental executive retirement plans, known as SERPs are neither exempt nor limited. Yes, they are an inefficient way to compensate CEOs but they come with one great benefit – camouflage. “Neither the increase in value of the SERP plan before retirement nor the amount of payments after retirement appears in the compensation tables, the existence of SERPs, and the formulas under which payouts are made must be disclosed in the firm’s SEC filings.”

While CEOs want to keep their owned defined benefit plans, they frequently want to outlaw them for public employees. As The Corporate Library points out, when the pension plans for their own employees go south, CEOs tend to ensure they still get theirs. Fat cats apparently have no shame. Neither shareowners or the public are really mobilized around the issue, even though many seem to have pitchforks at the ready.