If shareholders hope that the Securities and Exchange Commission’s new rules for disclosing executive compensation will bait companies into curbing Supplemental Executive Retirement Plans as an additional perk for executives, corporate boards are not biting. Yet.
According to a Compliance Week analysis of perks offered by 250 large companies, SERPs are one of the most prevalent benefits, offered by 70.4 percent of the group. Only personal use of corporate aircraft is more common.
Paul Hodgson, senior research associate for governance research firm The Corporate Library, likewise reports that of 353 companies in the Standard & Poor’s 500, 73 percent disclosed SERPs in addition to other defined-benefit pension plans in their 2007 proxy statements. To date, those executives have accrued $2.6 billion in retirement benefits, Hodgson found.
For companies and executives alike, several factors contribute to SERPs being more attractive than defined-benefit pension plans alone. While both are entirely employer funded, SERPs are not tax deductible, making them much less regulated than traditional pension plans. Companies also have a lot more flexibility in how they design a SERP.
Dolmat-Connell
“Typically, the nonqualified deferred compensation plans are employee-voluntary contributions,” says Jack Dolmat-Connell, of compensation consulting firm DolmatConnell & Partners. That is, employees have the option of putting aside additional components, such as salary, bonus, and stock option gains until retirement.
Traditional pension plans, in contrast, are capped at a $225,000 contribution limit. “At some point in the past, the IRS decided that very highly compensated employees should not be able to have contributed to a pension plan above and beyond a certain level,” says Hodgson.
Therefore, if a company were to contribute 6 percent of an executive’s pay into a qualified 401(k) plan, for example, it could only give 6 percent of that salary up to $225,000, explains Janet Den Uyl, an executive-benefits specialist at Mercer Human Resource Consulting. And in an era when million-dollar annual salaries aren’t uncommon for CEOs, six percent of $225,000 isn’t a whole lot of money.
“If an executive is making $1 million a year, that’s not going to give him or her enough retirement income to basically replace what it is they’re walking away from when they retire,” Dolmat-Connell says.
That is where a SERP enters the picture. “You think of it really as an addition to a normal pension plan, to allow the executive to accumulate enough retirement dollars basically to replace a certain percentage of their income when they retire,” Dolmat-Connell says.
Investor Ire
Investor activists, on the other hand, argue that top executives accumulate too much money and that SERPs are not based on service and performance like they should be. And as many companies are now abolishing defined-benefit retirement plans for rank-and-file employees as rapidly as possible, SERPs are all the more controversial.
“From a critic’s standpoint, SERPs are often viewed as giveaways to executives,” says Dolmat-Connell.
Hodgson
While compensation committees say they use SERPs as a retention tool, such attempts have proven futile, according to Hodgson. He examined the tenure of CEOs to see if those with supplemental retirement benefits stuck with their companies longer than those executives without SERPs. His findings: “The tenure for both CEOs was exactly the same,” Hodgson says. SERPs as lures to keep executives in the C-suite “doesn’t appear to be working given the findings that I have.”
The Corporate Library also estimated the average value of SERPs at S&P 500 companies to be $10.1 million. Still, that’s small change compared to what some individual CEOs are expected to take into the sunset. At the top of the list is Jefferies Group CEO Richard Handler, whose total retirement package is valued at nearly $202 million, according to the study.
Whitacre
Second on the list is AT&T former CEO Edward Whitacre. The Corporate Library pegged his pension package at $158.5 million, plus $24,000 in annual automobile benefits, $6,500 in annual home security, and 10 hours per month access to AT&T’s corporate jet, according to the company’s most recent proxy.
Full Disclosure
Hodgson’s study also found that some companies have already been meeting the spirit of frank disclosure of executive pay, so the SEC’s new rules forcing such disclosure have not had much effect on them. He cites Honeywell International as a prime example.
“For the last five years, Honeywell has indicated how much it spends on legal fees, relocation, flexible benefits, temporary housing, auto insurance, above market interest, and matching contributions to deferred compensation plans,” Hodgson wrote in his study. “And this was during a time when most compensation committees would not even acknowledge that such perquisites were provided to executives, never mind how much they cost.”
Companies included in Compliance Week’s research that appear to have done a good job disclosing SERPs and their value include CIT Group, Safeco, American Express, and Alcoa. CIT, for example, provides two tables for each of its five proxy executives: one identifies each executive’s normal retirement year, the other what retirement benefit that executive stands to earn.
Alcoa, meanwhile, provides a table that shows the years of pension service, current average final compensation, and annual pension benefit for the named executive officers accrued as of Dec. 31, 2005, assuming payment at age 65 before any reduction for surviving spouse coverage.
Other companies have expressed interest in improving their communication efforts with shareholders. Pfizer’s board of directors, for example, recently announced that it plans to initiate a meeting with the company’s largest institutional shareholders to discuss the company’s corporate governance policies and practices. The meeting is planned for the fall.
Too Soon
As for how other companies will react, it’s still too soon to tell. To say otherwise would be “a rush to judgment,” Uyl says.
“From a critic’s standpoint, SERPs are often viewed as giveaways to executives.” Dolmat-Connell
— Jack Dolmat-Connell,
Managing Partner,
DolmatConnell & Partners
It’s also difficult to predict whether the new disclosure will lead to smaller SERPs because each company will reach that decision for itself. “It depends on the board involved,” says Hodgson. “There are other companies who may just tinker with the rules of the plan, so while benefits are still provided, they don’t provide excessive benefits.”
Dolmat-Connell speculates that more companies might start to offer performance-based SERPs.
Before making any decisions, however, boards should first look at the total compensation strategy, Uyl says. “They should be validating, ‘How does this compare to other components of pay, and do those objectives still work for our company given what our business strategy is?’” she says. “There’s nothing necessarily wrong about an enhanced SERP. You have to understand how it’s being used.”
One point experts do agree on is how the SEC disclosure rules make boards “sit back and consider” what benefits are reasonable versus those that are merely competitive, says Hodgson.
Uyl agrees: The new rules “don’t mean they’re going to get rid of [SERPs], but it means they’re going to reevaluate them.”
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