As Workers' Pensions Wither, Those for Executives Flourish
Companies Run Up Big IOUs, Mostly Obscured, to Grant Bosses a Lucrative
The Billion-Dollar Liability
By ELLEN E. SCHULTZ and THEO FRANCIS
June 23, 2006; Page A1
To help explain its deep slump, General Motors Corp. often cites
"legacy costs," including pensions for its giant U.S. work force. In
its latest annual report, GM wrote: "Our extensive pension and
[post-employment] obligations to retirees are a competitive
disadvantage for us." Early this year, GM announced it was ending
pensions for 42,000 workers.
But there's a twist to the auto maker's pension situation: The pension
plans for its rank-and-file U.S. workers are overstuffed with cash,
containing about $9 billion more than is needed to meet their
obligations for years to come.
Another of GM's pension programs, however, saddles the company with a
liability of $1.4 billion. These pensions are for its executives.
This is the pension squeeze companies aren't talking about: Even as
many reduce, freeze or eliminate pensions for workers -- complaining of
the costs -- their executives are building up ever-bigger pensions,
causing the companies' financial obligations for them to balloon.
Companies disclose little about any of this. But a Wall Street Journal
analysis of corporate filings reveals that executive benefits are
playing a large and hidden role in the declining health of America's
pensions. Among the findings:
� Boosted by surging pay and rich formulas, executive pension
obligations exceed $1 billion at some companies. Besides GM, they
include General Electric Co. (a $3.5 billion liability); AT&T Inc.
($1.8 billion); Exxon Mobil Corp. and International Business Machines
Corp. (about $1.3 billion each); and Bank of America Corp. and Pfizer
Inc. (about $1.1 billion apiece).
� Benefits for executives now account for a significant share of
pension obligations in the U.S., an average of 8% at the companies
above. Sometimes a company's obligation for a single executive's
pension approaches $100 million.
� These liabilities are largely hidden, because corporations don't
distinguish them from overall pension obligations in their federal
� As a result, the savings that companies make by curtailing pensions
for regular retirees -- which have totaled billions of dollars in
recent years -- can mask a rising cost of benefits for executives.
� Executive pensions, even when they won't be paid till years from now,
drag down earnings today. And they do so in a way that's
disproportionate to their size, because they aren't funded with
One reason executive pensions have grown so large is that they are
linked to ballooning overall executive compensation. Companies often
design retirement payouts to replace a percentage of what a person
earns while active.
But for executives, the percentage of pay replaced is itself higher.
Compensation committees often aim for a pension that replaces 60% to
100% of a top executive's compensation. It's 20% to 35% for lower-level
David Dorman was chief executive of AT&T Corp. from 2002 until its
merger with SBC Communications in November. He left in January. His
total of five years at AT&T earned him a yearly pension of $2.1
million. That will replace 60% of his annual salary and bonus in his
final three years.
By contrast, former AT&T accountant Ralph Colotti's $28,800 annual
pension replaces 33% of his final pay. He was at the company for 33 years.
Mr. Colotti's pension was held down by a change AT&T made in 1998 in
the formula used to calculate pensions. The switch had the effect of
freezing pension growth for older workers like him. The 55-year-old now
works at another company with a pension plan. "Working here another 10
years won't make up for what my old pension would have been" without
AT&T's change in formula, he said.
AT&T described its retirement benefits as excellent and said a pension
on the scale of Mr. Colotti's is good in the telecommunications
industry. Mr. Dorman's richer deal is "reasonable, customary and
comparable to what similarly sized companies offer," AT&T said. A
spokeswoman noted that "in any industry, senior executives are almost
always provided with enhanced levels of benefits as a way to recruit
and retain the best talent and the best leadership possible to lead the
In percentage of pay replaced, Pfizer's chairman and CEO, Henry
McKinnell, does best of all. His future $6.5 million-a-year pension
will replace 100% of his current salary and bonus.
Even as executives' pensions grow, many companies are curtailing those
for the rank and file. In one move, hundreds of employers, including
Boeing Co., Xerox Corp. and Electronic Data Systems Corp., have
switched to pension formulas known as "cash balance" plans. One effect
is to slow the growth of older workers' pensions or halt it altogether.
That's what happened to Mr. Colotti at AT&T.
Other companies, including Verizon Communications Inc., Unisys Corp.
and Sears Holdings Corp., are freezing their pension plans for some
workers. A freeze leaves intact pensions already earned but prevents
any further growth during a worker's career.
Some employers have added pensions for executives at about the same
time as they limited those for others. McKesson Corp. established a
special pension plan for its executives in 1995 and froze those of
other workers two years later. McKesson didn't respond to requests for
Allied Waste Industries Inc. froze pensions for certain salaried
workers in 1999. Among those affected was Brad Green, then a safety
official at a business Allied Waste had acquired. Although he never
expected his pension to be big, said Mr. Green, 45, the freeze meant
any future growth "was basically just wiped out with the stroke of a pen."
Four years later, Allied adopted a pension plan that covers 10
executives. It did so "to provide a competitive recruitment and
retention benefit," said Allied's treasurer, Michael Burnett. He noted
that the plan that was frozen had come from a company Allied acquired.
Mr. Burnett added that all employees have a 401(k), a savings plan to
which they can contribute from their own earnings. Many companies,
including Allied, match part of employee contributions.
Companies that restrict regular pension plans often point to the
401(k), some noting that they've enhanced their match of contributions.
Unlike pension plans, 401(k) plans don't create a corporate debt or
liability, since employees provide most of the assets and firms are
typically free to halt any contributions of their own.
Companies generally are also free to alter, freeze or end regular
employees' pension plans, unless a union contract is involved. But
executive pensions often are protected from management interference by
employment or other contracts.
By curtailing pensions for regular workers, large companies have
reduced pension obligations to them by billions of dollars in recent
years. So pension obligations to regular workers are stable or
shrinking at many companies while those for executives rise. At
BellSouth Corp., for example, the obligations for pensions for ordinary
workers have edged down 3% since 2000. The liability for pensions for
executives is up 89% over the same period. A BellSouth spokesman noted
that, like many executive pensions, the benefit could be lost in the
event the company becomes insolvent.
The promise of any pension becomes a corporate obligation. Although the
payments are in the future, the promise means the company has a
liability now. And a number can be put on it.
Figuring the Bill
Pfizer's promise to pay Mr. McKinnell $6.5 million a year for life in
retirement equals an $83 million liability for Pfizer today, federal
filings by the drug maker show. Pfizer defends Mr. McKinnell's pension
When Edward Whitacre, chairman and CEO of AT&T Inc., turns 65 in
November, he'll be entitled to a pension of $5.4 million a year for
life, plus an $18.8 million lump sum. For this, AT&T's liability today
is $84.4 million, according to an actuarial estimate done for the
Journal by Katt & Co. of Mattawan, Mich. AT&T said Mr. Whitacre's
pension reflects four decades of service and 15 years of "very, very
strong and visionary management" as chief of the company, which was
called SBC much of that time.
UnitedHealth Group Inc. Chairman and CEO William McGuire will get a
$5.1 million annual pension after he retires, plus a further $6.4
million at retirement. The result is a UnitedHealth liability of about
$90 million, according to two actuaries. UnitedHealth declined to
comment on their estimate. In the wake of recent criticism of Dr.
McGuire's pay -- which includes $1.6 billion in unrealized stock-option
gains as of the end of last year -- the managed-care company has capped
his pension benefit, a spokeswoman said.
Companies sometimes offer several tiers of pensions for the highly
paid. The structure at IBM illustrates this.
Its chairman and CEO, Samuel Palmisano, is due a yearly pension of
about $4.7 million in retirement after age 60. He's now 54. IBM's
liability today for this is about $50.3 million, according to an
estimate by Katt & Co.
Another IBM pension plan, which last year covered eligible executives
earning $351,000 or more, had a $204 million liability at year-end,
company filings show. And for a third plan covering a broader group of
the well-paid, IBM had obligations totaling $1.1 billion. IBM declined
to say how many are covered by these plans, saying only that it is
To put the figures in perspective: The liability for IBM's regular U.S.
pension plan, covering 254,000 workers and retirees, was $46.4 billion
at the end of 2005.
An IBM spokesman described the estimate of its liability for Mr.
Palmisano's pension as high but declined to provide another figure. He
said Mr. Palmisano's pension from 32 years at the company will replace
about 45% of his compensation, which the spokesman called below average
for heads of major companies.
MORE ON EXECUTIVE PAY
� Deferring Compensation Also Creates a Company Debt to Executives1
A result of these trends is that executive pensions make up a
significant portion of total pension liabilities at many companies: 12%
at Exxon Mobil and Pfizer; 9% at Metlife Inc. and Bank of America; 19%
at Federated Department Stores Inc.; 58% at insurer Aflac Inc.
At some companies, the only people who have pensions at all are
executives. At Nordstrom Inc., the nearly 30,000 ordinary employees
don't get pensions. But 45 executives do. Another retailer, Dillard's
Inc., also provides pensions only to certain officers. Neither had any
Companies' retirement liabilities for their executives have also grown
through another little-noticed trend: Over recent years, an increasing
portion of executives' pay has been postponed, via pension and
deferred-compensation plans, rather than given in current paychecks.
(See adjoining article2.)
Out of Sight
Even if a company's liability for executives' pensions totals hundreds
of millions of dollars, its employees and shareholders may never know.
Companies don't have to report this obligation separately in federal
financial filings. A few specify it in a footnote, and some provide
clues that make it possible to derive the figure.
The minimal disclosure dates from the late 1980s, when companies first
were required to report pension liabilities but were allowed to
aggregate all of them. At the time, distinguishing executive pensions
was less of an issue because they were smaller. When they ballooned
along with executive pay in the 1990s and 2000s, the rules didn't
change. Most employers have continued to blend pension figures
together. Wall Street Journal publisher Dow Jones & Co. said it hasn't
broken out executive-pension figures but will "re-examine whether to do
so going forward."
When they do mention executive pensions in filings, companies often use
terms that only pension-industry insiders would recognize. Time Warner
Inc.'s filings include -- as part of a category called "other,
primarily general and administrative obligations" -- a footnote
reference to "unfunded defined benefit pension plans." Those are
Lumping pensions together can also give a false impression of the
security of ordinary workers' plan. Someone browsing Time Warner's
filings might think its pensions for regular employees were underfunded
by 7%. This impression would be illusory. The pension plan for regular
Time Warner employees has more assets set aside in it than the plan
needs to pay benefits well into the future. The shortfall is due
entirely to a plan for highly paid employees. That one has a $305
million unfunded liability.
A spokeswoman for Time Warner said the company's elite pensions cover
more than just a small number of top executives but declined to say how
many. She said Time Warner goes "to great lengths to make complex
information accessible to the average investor."
A Debt and Its Cost
Perhaps the most significant effect of the limited disclosure is to
make it difficult, or impossible, to evaluate company statements about
their retirement burdens and the need to cut benefits. To see this,
it's necessary to understand a bit about how pensions are accounted for.
Pension plans, whether for executives or for others, are obligations to
pay. In other words, they're debts. And like any debt, they have what
amounts to a carrying cost. That carrying cost is part of a company's
In the case of pensions for regular employees, the expense is partly or
wholly offset by investment returns on money the company set aside in
the pension plan when it "funded" it.
Executive pension plans are different. They're normally left unfunded.
They have no assets set aside in them. That means there is no
investment income to blunt the expense. The result is that obligations
for executive pensions create far more expense for an employer,
dollar-for-dollar, than pensions for regular workers.
A company's pension expense is something it has to subtract from its
earnings each quarter. The cost of executive pensions, having no
investment income to cushion it, hits the bottom line with full force.
An Outsize Impact
In Pfizer's overall U.S. pension obligation of about $9 billion,
executive pensions account for about one dollar in eight. Yet the
pension expense they generate is proportionately far larger -- equal to
more than half as much as that from pensions for regular employees and
retirees, who are much more numerous. The executive plans cover 4,200
people. The regular plans cover more than 100,000. Pfizer had no
comment on this.
At AT&T Inc., the pension liability for executives was a modest 3.8% of
the company's total pension obligation at the end of last year. Yet
these promises to 1,000 or so highly paid people generated more than
45% of AT&T's pension expense. The expense for them came to $113
million last year, and reduced AT&T's 2005 earnings by that amount.
The other 55% of pension expense? It covered 189,000 regular employees.
AT&T's controller, John Stephens, confirmed that executive pensions
cause a bigger drag on earnings, per dollar of liability, than pensions
for others. He added that AT&T, like some other companies, has
informally earmarked an undisclosed amount of assets for paying
executive pensions in the future. But while these assets earn
investment returns, they don't lower pension expense, because the
assets aren't irrevocably dedicated to this purpose. The executive
pension plan, in other words, isn't funded.
Why don't companies just fund executive pensions? Chalk it up to taxes.
Contributions that companies make to regular pension plans are
tax-deductible and grow tax-free. Congress set that rule to encourage
employers to provide pensions for the rank and file. But a company that
contributes assets to an executive pension plan gets no tax break. In
fact, there's a tax penalty: Money contributed to such a plan is
considered current compensation to the executives, and they owe
personal taxes for it.
There's often another reason executive pensions are more costly. The
expense of regular pensions can be offset not just by investment
returns on the assets but also by gains that result when companies cut
Cutting a benefit naturally cancels part of an employer's liability.
Under accounting rules, a canceled liability equates to a gain. That
gain reduces pension expense from the regular workers' plan. So thanks
both to investment returns and to gains from cutting benefits, regular
pension plans are less costly than those for executives.
These accounting effects may sound technical but they matter, because
companies that curtail ordinary workers' benefits often cite their
pension "costs" or "expense" as the reason.
In January, IBM said it will freeze the pensions of all U.S. employees
and executives. The move reduced its pension liability by $775 million.
IBM cited pension costs, volatility, and unpredictability. It didn't
mention that a quarter of its U.S. pension expense last year resulted
from pensions for several thousand of its highest-paid people.
The numbers: $134 million of pension expense was for the well-paid;
$381 million was for all active and retired employees, more than a
quarter of a million people. An IBM spokesman confirmed the numbers but
said the expense for its executive plans came to only about 1% of
pretax earnings from continuing operations.
Lucent Technologies Inc. has pointed to retiree benefits as a burden
and has cut benefits in a number of ways. For instance, for various
retirees in recent years, Lucent has used a less-generous pension
formula; eliminated dental and spousal medical coverage and death
benefits; and raised retiree health-insurance premiums. In a recent
filing, the Murray Hill, N.J., telecom-equipment firm said, "Lucent's
pension and postretirement benefits plans are large...and also costly."
Yet the pension plans for regular Lucent employees and retirees, who
number about 230,000, are overfunded. In fact, they're so full of cash
that the investment return on their assets not only erases the pension
plan's expense -- it adds to earnings. In the fiscal year ended last
Sept. 30, these pension-plan assets pumped $973 million into Lucent's
bottom line, accounting for about 82% of the company's profit.
They would have pumped in still more, save for an unfunded pension plan
for Lucent's highest-paid people, which had a liability of
approximately $422 million last year. Lucent confirmed that pensions
for its executives and those earning more than $210,000 in 2005 reduced
net income. It declined to say by how much. A spokeswoman said Lucent
follows U.S. pension accounting and disclosure rules and that if the
expense for retiree medical plans were subtracted, its overall
retirement benefits contributed $718 million to income.
When General Motors cites retiree costs, the giant auto maker has a
point: It owed nearly 700,000 U.S. workers and retirees pensions that
totaled $87.8 billion at the end of last year.
But $95.3 billion had already been set aside to pay those benefits when
All of these assets are earning investment returns, which offset the
pensions' expense. GM lost $10.6 billion in 2005. But deep as its
losses have been, they would have been far worse without the more than
$10 billion per year in investment income that the GM pension plan for
the rank and file generates.
The pension plan for GM executives is another matter. Unfunded to the
tune of $1.4 billion, it detracts from GM's bottom line each year.
Just how much is a mystery, because GM doesn't break out the figure. It
said executive pensions are "a very small portion of our overall
expense" but declined to give the figure.
Earlier this year, GM announced it would freeze the pensions of its
42,000 salaried workers starting next January, as well as of those
5,200 highly paid employees. The freeze of the executive pensions will
cut GM's pension liability by $60 million, while its freeze of salaried
workers will yield a far bigger reduction, $1.6 billion.
A spokeswoman for GM said its concerns about its pension plans have
eased, though the company remains concerned about retiree health-care
costs. With the pension freeze and improved returns on its pension
assets, including billions of dollars GM has contributed to the plans
in recent years, "I would say pension really is not a problem any
more," the spokeswoman said. She said that GM has no fixed obligation
to pay the executive benefits and could renege at any time, although
she called such a move unlikely.
GM has often said its U.S. pension plans added about $800 to the cost
of each car made in the U.S. in 2004. It declines to say how much was
due to executive pensions.
Write to Ellen E. Schultz at firstname.lastname@example.org and Theo Francis at
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Deferring Compensation Also Creates
A Company Debt to Executives
By THEO FRANCIS and ELLEN E. SCHULTZ
June 23, 2006; Page A8
Besides pensions, most large companies owe their executives another
retirement debt: deferred compensation. While that might seem unlike an
executive pension, it's similar in critical ways.
Deferred-compensation plans let executives put off receiving large
chunks of their salary and bonus until retirement. The plans have often
let executives defer other pay as well, such as gains from exercising
stock options. The deferred sums grow tax-free. Sometimes they increase
at an above-market interest rate guaranteed by the company. Some
companies also add to the balances with contributions from time to time.
"Deferred-comp" plans are similar to pensions in that they represent
money a company must pay in the future for work done today. As a
result, the plans are liabilities for the companies -- that is, debts.
The carrying cost of this debt is something that companies must deduct
from their earnings each quarter.
Deferred-comp plans resemble executive pensions, in particular, because
they often aren't "funded." That is, companies usually don't lock away
assets in the plans to pay the money when due. So deferred-comp plans
affect company profits in much the same way as executive pensions do:
by reducing them.
Although deferred-comp plans are sometimes likened to 401(k) accounts,
there is a key difference: 401(k) plans don't create a corporate debt
or liability. That's because employees fund them with money from their
pay, and companies that choose to match part of the contributions are
free to stop any time.
Deferred-comp plans, however, create huge (and typically unfunded)
corporate liabilities. General Electric Co.'s liability for deferred
compensation is $2.4 billion. Its total unfunded liabilities for
executives -- deferred comp plus pensions -- equals more than 15% as
much as its total retirement liability for more than 500,000 workers
and retirees. GE said the executive-retirement liabilities aren't
significant for a company as big as GE, whose stock-market value is
about $350 billion.
At some companies, executive-retirement liabilities are almost as big
as the IOU for pensions of regular workers, who are far more numerous.
Countrywide Financial Corp.'s executive-retirement liability --
pensions plus deferred comp -- at the end of last year stood at $340
million. That was not far from its $373 million obligation for 25,915
ordinary workers and retirees. Countrywide said $35 million of the
executive liability was for pensions, the rest for deferred comp.
At one company, Comcast Corp., an executive-retirement liability of
$469 million exceeds the pension obligation for other employees, which
is $194 million.
The two were almost equal in 2003. But then Comcast froze two pension
plans for certain salaried workers. The freeze cut its debt to these
Comcast's deferred-comp liability lowered its earnings by $40 million
last year, which was five times as much as the drag on earnings from
the frozen pension plans for salaried workers.
Comcast said the frozen plans aren't a core part of its retirement
benefits because they arrived via an acquisition. "A 401(k) is our
primary retirement savings vehicle for our employees, not a pension,"
the company said.
Write to Theo Francis at email@example.com and Ellen E. Schultz at
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