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The mystery of executive pensions

Posted: Friday, May 16, 2003

NEW YORK (AP) We know the salaries of the top executives. We know how much their annual bonuses are. We know how many stock options they have.

But we don't know everything that goes into their compensation. Not even close.

We don't know all about their pensions. They're huge and getting bigger all the time.

''Executives are using preferential retirement plans to gain surreptitious pay,'' said Brandon Reuse, a research analyst for the AFL-CIO, which is lobbying for compensation reform.

Executives, like rank-and-file workers, can participate in company-sponsored pension plans, which promise future payments to employees based on a percentage of annual income.

But executives often complain that federally imposed caps curb the amount of their annual pensions at $160,000. Given their hefty paychecks, they think they should get more.

That's led many companies to set up special retirement programs just to service top officers, which some critics say is yet another back-door way to line executives' pockets.

And they are doing that without having to disclose much.

''This creates an uber-tier of employees,'' said Bill Coleman, senior vice president of compensation at Salary.com in Wellesley, Mass. ''They just keeping adding and adding to executive hidden benefits.''

Much of the confusion comes in the disclosure of supplemental executive-retirement plans, or SERPs, which offer pension payments usually based on a certain percentage of an executive's highest average compensation.

Companies must say when a SERP exists, but details beyond that are slim.

In fact, when companies offer these plans, they often don't immediately set aside money to fund them. Companies just lump what they've promised to pay into a liability in their financial statements called a pension obligation.

But that liability covers anyone entitled to a pension both executives and employees so investors can't get any sense of the size of the potential executive payouts.

Breaking down individual benefits is even trickier. Most companies just provide a table in their annual proxy statements that generally states the expected pension payouts for executives based on ranges of final average earnings and years of service.

That often leaves it up to the investor to try to crunch the possible pension for each executive, which is impossible when companies only have to provide annual earnings and years of service for their top five officers.

And it's even tough to figure out the correct metrics to use when calculating potential payouts for the executives whose compensation is disclosed.

At American Airlines, for instance, the SERP covers 45 executives and the airline says in its proxy statement to shareholders that the SERP is based on the final average of base salary, incentive compensation and performance returns.

But you have to go to the plan description in the back of its annual report to find that the final average isn't based on the last few years that an executive worked, or that the years used don't have to be consecutive.

Instead, it includes the average of their four highest incentive bonuses as far back as 1985, when its SERP first started. Independent of that, it also includes the average of the four highest years of performance bonuses from 1988 to the last year they were offered in 1999, according to American spokesman Bruce Hicks.

By cherry-picking their best bonuses, American executives could potentially have their pensions based on an average compensation higher than what they actually made in any given year.

Once companies decide to fund these pensions so they can be paid out, some create special secure trusts that are protected from bankruptcy or if business fails. But they are only required to disclose that the trusts exist, not how much is included or the portion allocated to each executive.

American Airlines created a secular trust in October, but didn't reveal until last month that it had been funded with $41 million. That made headlines because the carrier was asking its work force for major concessions at the same time to stay out of bankruptcy.

''Companies need to ask themselves if they are doing too much ... and whether are they creating hidden additional compensation,'' said Robin Ferracone, worldwide partner at Mercer Human Resources Consulting in Los Angeles.

The business scandals were supposed to spur greater corporate disclosure. That doesn't seem to hold true when executives have their own interests on the line.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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