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  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.

By Janice Revell

Fortune, Monday, April 14, 2003

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. 

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