A Double Standard: Executive Pensions
Over the past thirty years, corporations have been eliminating or freezing their defined benefit pensions because they did not want to bear the risk or cost of providing retirement security for their employees. The rank and file have been left with 401(K) accounts that don’t come close to providing enough income to retire. Even where the defined benefit pension has been eliminated, senior executives have little to worry about. Their base compensation, deferred compensation plans, stock appreciation units, and stock options provide more than enough wealth to ensure a retirement bathed in luxury.
In today’s Wall Street Journal, Theo Francis and Andrew Ackerman report that companies that still provide defined benefits for their executives are defending the rising costs as merely accounting mechanics. For example, low interest rates used to discount liabilities and extended life expectancy are boosting the value of all pensions, but especially the large sums owed senior executives at companies like General Electric and Lockheed Martin. These assumptions are the very same factors that have driven companies to freeze or eliminate defined benefit plans. However, when it comes to senior executives, major corporations are telling shareholders and the public that we shouldn’t count these rising costs when we evaluate levels executive compensation because they are merely accounting conventions.
To give you an idea of what I’m talking about, GE owes Chairman and CEO, Jeff Immelt, $74 million in pension benefits, which consist of about $2 million under the general plan, and the balance under a supplement plan (companies have supplemental plans because the IRS has a cap on the amount of pension benefits that can be deducted). The prior year this figure was about $56 million. Clearly, the accounting requirements drove up the total. GE has created a separate column in its compensation table to strip out the affect of accounting. Of course, they don’t do that when it comes to the pensions of the average employee.
The bigger issue is that Mr. Immelt has a huge pension coming that he will never need, no matter the accounting assumptions. He’s receiving about $10 to $20 million in realized compensation per year. He owns 6.1 million shares of GE stock (up from 5.3 million in 2014), which is worth $150 million, and has generous life insurance and other benefits.
To be fair, General Electric’s proxy statement is model of transparency and disclosure. Moreover, GE has eliminated termination and change of control provisions in their contracts, which are steps in the right direction. Nonetheless, GE and other big companies have an army of lawyers, accountants, and compensation experts to help justify their compensation, which GE and others are using to diffuse the rising cost of executive pensions.
Clearly, disclosure is doing little to stem the tide of escalating executive compensation. Senior executives would prefer to hide their pay packages from public scrutiny and dislike the disclosure mandated by the SEC. However, given a choice between a bit of embarrassing publicity and receiving all the benefits and perks, they’ll take the benefits and perks. The rest of us have a retirement crisis to sort out.