SERPs are in the cross-hairs of shareholder activists.

The Association of BellTel Retirees, which advocates on behalf of retirees from Verizon Communications and its subsidiaries, recently hammered out a compromise deal with Verizon over these controversial non-qualified retirement extras for top execs, called a Supplemental Executive Retirement Plan.

Under the pact, Verizon agreed to scale back the scope of its SERPs for senior executives. In return, the retirees agreed to withdraw a related shareholder resolution, which in 2004 received support from 37.2 percent of the shareholders who voted and won support from groups including CalPERS, according to the retirees.

Currently, Verizon senior executives receive SERP contributions equal to 32 percent of their combined base salary plus bonus for every dollar above $210,000 during their first 20 years in the plan. After the first 20 years, the SERP contribution rate is reduced to 7 percent.

Too expensive for shareholders, charged the retirees, pointing out that last year Verizon projected a $161 million contribution to its nonqualified pension plans for 2004 alone and more than $400 million over three years.

Under the agreement, Verizon agreed to reduce the accrual of future senior executive benefits, including the 32 percent retirement contribution credit on eligible compensation down to a range of 4 to 7 percent, as of the end of 2004.

“This is the same pay-credit percentage range received by all other management employees who participate in the Verizon Management Pension Plan,” the telecom giant points out in its proxy.

A Verizon spokeswoman told the Investor Responsibility Research Center that the change came about as a result of change in the tax laws. “Recent changes to the tax code did reduce executives’ flexibility to receive certain deferred compensation without incurring immediate taxation,” the IRRC acknowledges.

"Unearned Years Of Service Pension Credit"

This is not the only fight this year over SERPs.

The IRRC counts five other proposals calling for shareholders to approve extra benefits under SERPs this proxy season. It notes that the AFL-CIO is backing three—at Sprint, Angelica, and American Electric Power. Two similar proposals also are being submitted this year to AT&T and Qwest Communications, the IRRC adds.

Last year, there were six SERP-related proposals, receiving, on average, 34 percent support, according to the proxy research firm. Just one proposal—targeted at Delta Air Lines—received majority support of 53.2 percent, according to the IRRC.

Currently, 339 of the S&P 500 companies have some sort of SERPs, according to a Corporate Library study conducted specifically for The New York Times.

A SERP typically supplements an employer’s qualified defined benefit or defined contribution pension plan with election and distribution provisions that track those in the qualified plan, according to Mercer Consulting.

Opponents of these plans criticize them for several reasons. The AEP resolution, sponsored by the AFL-CIO, for example, complains that certain top executives receive additional years of service credit not actually worked. Recipients also enjoy preferential benefit formulas not provided under the company’s tax-qualified retirement plans, accelerated vesting of pension benefits, and retirement perquisites and fringe benefits that are not generally offered to other company employees.

Draper

For example, recently replaced Chairman and CEO E. Linn Draper and Chief Financial Officer Susan Tomasky received 24 and 20 additional years of service pension credit, respectively, according to the resolution. In addition, Chief Operating Officer Thomas Shockley will receive approximately eight extra years of pension service credit and Executive Vice President Thomas Hagan will receive approximately six extra years of pension service credit if they remain employed with the company until age 60.

“Providing senior executives with unearned years of service pension credit increases the cost of company’s SERPs to shareholders,” the resolution states. “In our view, the actuarial present value of an executive’s extraordinary retirement benefit can be worth tens of millions of dollars. In addition, we believe these extraordinary pension benefits are unnecessary given the high levels of executive compensation at our company.”

“To help ensure that the use of extraordinary pension benefits for senior executives are in the best interests of shareholders, we believe such benefits should be submitted for shareholder approval,” the Group asserts. “Because it is not always practical to obtain prior shareholder approval, the company would have the option of seeking approval after the material terms were agreed upon.”

Stealth Compensation

For its part, AEP argues that the SERP is necessary to attract “superior talent.” It adds that the HR Committee “believes all of AEP’s compensation programs are consistent with utility and general industry practice for companies of comparable size and are necessary to attract, motivate, reward and retain talented executives.”

Noting that only 28.6 percent of shares voted were in support of a substantially identical proposal at 2004’s annual meeting, AEP also stresses that the salary and bonuses of AEP’s executive officers “are consistent with AEP’s compensation peer group.”

Van Putten

Steve Van Putten, compensation practice leader for Watson Wyatt, says critics are also not happy that SERPs are non-performance-based. “They (recipients) are paid to stay,” he adds.

Another criticism of SERPs is that their value is difficult to even find, let alone compute, when you go through a company’s proxy. “They are a form of stealth compensation,” he adds. Van Putten says that in most cases, the benefits are not very well disclosed. It is not clear what executives are getting at the time of retirement and you can’t simply go to the proxy and readily see in a table what the SERP benefit is, like you can with salary and bonus.

“Even a person who pays attention to this can’t figure out how the compensation committee reached its decision,” insists Gene Capello, managing director of Proxy Governance’s policy staff, which is responsible for the development of the firm’s proxy analysis policies.

This could change soon, points out Shirley Westcott, associate managing director of policy of Proxy Governance. “This is one area where the SEC made comments on compensation disclosure.

Beller

Indeed, in a speech last fall—which we reported on at the time—Alan Beller, director of the SEC’s Division of Corporation Finance, challenged companies to dramatically improve their transparency. He even went so far to warn that if there is a material omission, the company will be deemed to be not in compliance with SEC requirements.

“Disclosure is required of all compensation, earned or paid, from all sources, for all services,” Beller said. “And there can be no material omissions that make the disclosure misleading. Too much executive compensation disclosure has become an example of the kind of disclosure companies should disavow—disclosure that says as little as possible while seeking to avoid liability, rather than disclosure that seeks to inform.”

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