The lavish retirement plans, low-interest loans and other perquisites showered
on Enron Corp. managers have put a spotlight on a growing corporate trend--one
of ever-richer executive benefits packages whose costs often can be hidden from
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.
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.
Wisconsin Investment Board
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
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'
"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
* 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
* 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
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
* 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
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.
* 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
Copyright 2002 Los Angeles Times