The trend has been [for executives] to be greedier and greedier, even though there's a recession. All this is designed to keep executives whole while the rank and file loses ground.

Cynthia Richson Wisconsin Investment Board

Compensation experts say companies are increasingly using executives' benefits packages, which already are far more generous than those offered to rank-and-file workers, as a way to quietly beef up total pay for top managers regardless of how their company performs.

Sumptuous paychecks for executives are nothing new. But shareholder activists say weak regulatory requirements, along with a faltering stock market, are leading to unchecked growth in executive retirement plans and other benefits even as lower-ranking workers face losses and cutbacks in their own plans. "The trend has been [for executives] to be greedier and greedier, even though there's a recession," said Cynthia Richson, director of corporate governance for the State of Wisconsin Investment Board. "All this is designed to keep executives whole while the rank and file loses ground."

As many workers' 401(k) retirement plans shrink, executives at some companies get guaranteed returns on their investments. Other companies pour hundreds of millions into special executive-only retirement accounts. Firms also pay for big insurance policies and offer executives multimillion-dollar loans, complete with below-market interest rates and a company promise to forgive some of the payments.

Unlike salaries, bonuses and stock options--which must be laid out in government filings--the true cost of these benefits is often difficult, if not impossible, for outsiders to determine, said Ken Bertsch, director of corporate governance for TIAA-CREF, the world's largest pension fund manager.

For a variety of accounting and regulatory reasons, companies often are not required to report the price tag for many of their executive benefits to the Securities and Exchange Commission. When benefits are disclosed, their costs can be tucked into footnotes or lumped into a catchall category of "other compensation," said Nell Minow, editor of the Corporate Library, which tracks compensation trends.

The costs of many executive retirement plans are particularly easy to hide, since companies have to reveal few details, compensation experts said.

"The regulatory disclosure rules are so weak, [companies] can get away with one or two ambiguously worded sentences in the middle of a paragraph about the rank-and-file [retirement] plan," Richson said.

These feeble disclosure requirements, combined with poor stock market performance, have spawned a cottage industry in the last year of compensation consultants who are promoting supplemental executive retirement arrangements, benefits experts said. These plans are designed and promoted specifically as a way to enhance compensation that's "off the radar screen of shareholders," Richson and other compensation experts said.

Unlike stock options or bonuses, which are tied to the company's performance, executives benefit from these supplemental retirement plans whether or not the company does well.

Executives can lose these retirement benefits if the company declares bankruptcy, since the plans are not protected by the government-run Pension Benefit Guaranty Corp. But shareholder activists say most executives are at little risk because relatively few companies actually go broke.

Companies say they need to offer ample benefits to attract and retain top-flight managers. In addition, many of the plans designed for rank-and-file workers don't provide enough retirement pay for executives used to living on much higher salaries, compensation consultants said.

Traditional pension plans limit benefits to highly paid executives because the plans can take into account no more than $200,000 of salary when determining benefits. The IRS also requires companies to cap the 401(k) contributions of their highest-paid workers, so many executives are prevented from making the full $11,000 annual contributions the law otherwise allows.

About 60% of the executive retirement plans Mercer surveyed in 1998 made up for the benefits that otherwise would have been lost to IRS rules, said Janet M. Den Uyl, head of executive benefits and compensation for William M. Mercer Inc., a compensation consultant.

The 40% of companies that offer richer plans--either to all their executives or to their top one or two leaders--often are trying to lure talent from other firms or prevent defections, Den Uyl said.

The richest arrangements of all, not surprisingly, are aimed at the companies' top leaders.

"There's more license at the CEO level," Den Uyl said. Most CEOs already have rich compensation packages, "and they're not ready to throw those away" when hired by a new company.

Here are some of the non-salary perks companies have made available to top managers:

* Guaranteed returns on investment. Top executives at Enron could contribute salary and bonuses to so-called deferred compensation accounts with guaranteed minimum annual returns of 12%. Struggling telecom-equipment giant Lucent Technologies Inc. has a similar plan that promises to pay five percentage points more than the 10-year Treasury rate. Currently, that Treasury rate is about 5%, which means Lucent executives in the plan get a 10% return on their investments.

Enron and Lucent are far from alone. About half the companies that offer deferred compensation plans provide a guaranteed minimum return, according to a Mercer study.

* Bigger company matches. The typical company match for a 401(k) defined contribution plan is 50 cents for every dollar the employee contributes, up to 6% of the worker's salary. For a worker who takes full advantage of the company match, the employer's contribution represents 3% of his or her pay, or $1,500 a year for a worker making $50,000.

The company contribution for an executive version of a 401(k) is typically 60% higher. The average company contributes 5%, and nearly half of the companies surveyed contribute even more, the Mercer study found.

The dollar amounts contributed can be substantial. Intel Corp. contributed $1.3 million to the defined contribution accounts of its top five executives in 2000, including nearly $400,000 to the account of Chief Executive Craig R. Barrett, whose salary and bonuses that year totaled $3.4 million. But unlike many other firms, Intel makes such contributions for all of the about 10,000 employees whose ability to contribute to the regular 401(k) is restricted, Intel spokesman Chuck Mulloy said.

* Huge low-cost loans. SEC filings show telecom company Global Crossing Ltd., which filed for bankruptcy protection this week, made an $8-million loan to then-Chief Executive Thomas J. Casey in November 2000 and a $1.8-million loan to President David Walsh in March 2001. Both loans were secured by the executives' homes, but the interest rates they paid--6.01% for Casey, 4.75% for Walsh--were three to four percentage points below prevailing rates on standard home equity loans at the time.

Enron's former chief executive, Kenneth L. Lay, frequently tapped a $7.5-million line of credit he could repay with company stock that Enron had given him or that he had purchased with low-cost company-provided options. His predecessor, Jeffrey K. Skilling, was given a $2-million loan. Enron had offered to forgive the payments if Skilling stayed with the company until Dec. 31, 2001, but he resigned Aug. 14.

* Lavish life insurance. Many workers get some life insurance through their employers--typically $50,000 or one year's pay.

Executives can get much more. About one-quarter of companies in the Mercer study have special executive life insurance programs that typically pay for coverage equal to three to four times the executives' annual pay.

Sometimes the benefit is much higher. In 2000, Cendant Corp., a travel and real estate company, paid $3.7 million in premiums on a $100-million life insurance policy for its chief executive, Henry R. Silverman, 60. Under the arrangement, known as a split-dollar policy, Cendant will recoup its premiums from the life insurance proceeds when Silverman dies, with Silverman's heirs receiving the rest of the money, according to Cendant's latest SEC filing.

* Company-paid taxes. Companies pay a variety of tax bills for certain executives. When benefits are so great that they incur a tax bill from the IRS--as they often do--some executives are given money to pay the tax. Because that cash payment also incurs income tax, companies often add an additional sum to cover the extra tax--a process known as "grossing up."

Lucent Chairman Henry B. Schacht was given $57,325 to pay tax on "certain fringe benefits" in 2000, according to the company's SEC filings. Ray R. Iritani, chief executive of Occidental Petroleum, was reimbursed $486,918 for taxes in 1999--and $95,000 for tax preparation services, SEC filings show.

* Fringe benefits. Other perks, such as the personal use of corporate jets, company-provided chauffeurs and company-paid financial planning, can add tens of thousands of dollars to an executive's total compensation.

The footnotes of Lucent's SEC filings show the company paid $26,351 for personal financial planning advice for Schacht in a year in which he received a $1.1-million paycheck. At Enron, Lay's personal use of a corporate jet in 2000 was worth $334,179.

Shareholder activists note that many of the most lavish arrangements have been uncovered at companies that have since hit hard times--among them Enron, whose compensation philosophy, according to SEC filings, was "to reward executive performance that creates long-term shareholder value."

"At a minimum, it's inconsistent for companies and executives to just keep feasting" when financial performance falters, stock prices drop and other employees face cutbacks, Richson, of the Wisconsin Investment Board, said. "It's bordering on unethical."

Copyright 2002 Los Angeles Times

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