Supplemental executive retirement plans, one of the flashpoints in the arguments over executive compensation, might face even more fire if the Securities and Exchange Commission proceeds with its plans for greater disclosure of executive pay.
According to compensation research firm Equilar, about one-third of public companies are already embracing greater disclosure policies even ahead of whatever new regulations the SEC might promulgate for the 2007 proxy season. A cornerstone of that greater disclosure is a simple, straightforward statement of the value of all executive compensation, including so-called SERPs—and that, Equilar research director Tim Ranzetta says, is sure to rile investors and employees who have seen so many of their own pension benefits frozen or eliminated.
“I think it’s the story of 2007,” Ranzetta says. He expects investor outcry to pressure companies to reduce or abolish SERPs, especially for new CEOs. His prediction: “In five or 10 years, [SERPs] will be significantly cut back.”
Others are less alarmist, but agree that the value of SERPs is about to come into much sharper relief for many companies, with public or investor irritation in tow. “There are always people at the bottom and they always want more,” says Joseph Hessenthaler, a retirement plan consultant at Towers Perrin. “I think it’s not clear where we are going.”
Bruce Brownell, senior vice president of Clark Consulting, says companies “will not respond to embarrassment alone.” He notes that new disclosure will make benchmarking of SERPs and other compensation easier, and suspects that the SEC’s new rules might even push executives at some companies to ask for more money once they can see where they stand relative to their peers.
“Each plan will stand on its own merits and continue to do so,” Brownell insists.
And, Hessenthaler adds, the more things change, the more they stay the same: If companies eliminate SERPs and then have trouble retaining or recruiting top executives, the marketplace will force those companies to create some other form of retirement plan to remain competitive. “The top group will still get special deals,” he says.
Types Of SERPs
Towers Perrin divides SERPs into several categories:
Defined benefit restoration plans, essentially designed to provide executives with retirement benefits that amount to the difference between what the individual is entitled to collect under the IRS legal limit on benefits, and what that person would have received were there no IRS cap. A “DB restoration plan” mirrors a qualified pension plan except for the limits, and is “almost ubiquitous,” Hessenthaler says.
Defined benefit SERPs, designed to provide a different benefit level than a qualified plan or restoration plan would normally provide. These plans typically follow a different benefit formula, include additional components of pay (and perhaps bonuses as well), contain more liberal early-retirement provisions, or additional service credits.
Defined contribution restoration plans, similar to a company’s 401(k) retirement plan and intended to restore benefits lost due to statutory limitations.
Defined contribution SERPs, to provide executives with different retirement benefits than a qualified plan or a restoration plan would normally provide. These plans typically include additional components of pay or provide for additional company contributions.
Towers Perrin does track data on current trends in SERP design; Hessenthaler wouldn’t disclose specifics, but says today’s trends are largely in step with a 2004 survey that said of the 126 companies sponsoring qualified defined-benefit plans for their whole workforce, 116 companies—as well as eight more that didn’t sponsor defined-benefit plans—maintained one or more separate defined-benefit plans for their executives. Of those 124 businesses, 30 sponsored DB restoration plans but not DB SERPs, 66 sponsored DB SERPs only, and 28 sponsored both DB restoration plans and DP SERPs.
All of the 160 companies in Towers Perrin’s benefits survey offered a defined-contribution plan, while 81 also had one or more defined-contribution plan for executives as well. Of those 81 companies, 47 offered DC restoration plans without DC SERPs, 31 offered DC SERPs only, and three offered both restoration plans and SERPs.
Disclosure And Consequences
Ranzetta notes that some companies have already done a good job disclosing SERPs and their value, and cites CIT Group, Safeco, PNC Financial, American Express, Newmont Mining and Alcoa as examples.
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 December 31, 2005, assuming payment at age 65 before any reduction for surviving spouse coverage.
Newmont Mining provides even more detail. In a comprehensive table, it labels how much an individual would earn in retirement. One column on the left lists the hypothetical retiree’s compensation at the year he retired, ranging from $500,000 to $2 million, in $100,000 increments. The proxy then lines up that level of pay with columns on the right listing what the executive’s expected annual pension would be based on years of service. For example, an executive making $600,000 at his retirement after 25 years of service would receive an annual pension of $262,500; someone who retired with a $2 million salary after 35 years would see an annual pension of $1.22 million.
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