NEW YORK (AP) Here's one way to get a higher interest rate on your savings: Just become a CEO.
While many corporations allow top executives to defer part of their multimillion dollar pay for tax purposes, some companies give those executives interest on that deferred compensation which is far more generous than an ordinary person can get through a money market fund or a bank CD.
Some companies go even further, paying a guaranteed interest rate on par with the return an average investor might hope for from stocks, but with none of the risk.
More than half of the companies in the Standard & Poor's 500 offer deferred compensation plans to their executives, including 36 which pay above-market interest rates, according to the compensation consulting firm Equilar Inc. More broadly, Equilar has identified 73 companies that pay above-market interest.
It's a topic that rarely draws attention as it did last year with news the New York Stock Exchange had been paying 8 percent interest to former chief Richard Grasso on part of his $139.5 million in deferred compensation probably because the rules of disclosure invite confusion, if not obfuscation.
McKesson Corp., a major distributor of prescription drugs, disclosed in June it owed $329,775 in ''above market interest'' to chairman and chief executive John Hammergren.
Similarly, Computer Sciences Corp. reported two weeks ago it owed $83,312 in ''preferential interest'' on deferred compensation for chairman and CEO Van Honeycutt in its latest fiscal year.
But those dollar amounts do not represent all of the interest the companies owe these executives on their deferred compensation.
Unfortunately, it's impossible to tell how much more they are due thanks to the convoluted disclosure rules.
To start with, a company only needs to disclose interest owed on deferred compensation if the rate being paid is more than one fifth above the market rate being used for the calulation.
So, for example, if the company decides the ''market rate'' is 5 percent, it wouldn't need to disclose anything about interest on deferred compensation unless the rate it is paying is greater than 6 percent.
Then the rules get more complicated.
There's no fixed definition or benchmark to determine what the prevailing market rate is, so it's up to the company to determine what rate to use. However, the company isn't required to disclose the percentage it chooses or the actual amount it is paying above that rate. Nor does it need say the total dollar amount of interest owed or the amount of deferred compensation on which it is being paid.
Instead, the company need only disclose any amounts paid above 120 percent of whatever market rate it has chosen. So, using 5 percent again as the hypothetical market rate, if the interest rate on deferred compensation was set at 8 percent, a company would only need to report the dollar amount owed on the interest above 6 percent.
That means at Target Corp. identified by Equilar as the company which paid more above-market ineterst to its CEO than any other in the last fiscal year the $900,826 owed to CEO Robert Ulrich is only the ''excess'' interest he was due. He also may have earned well more than $1 million from the interest Target wasn't required to disclose.
Though such gestures are not common, some companies who pay above-market interest voluntarily reveal some fragments of information, thereby prompting a few more head scratches.
In March, the drug maker Wyeth reported in its annual proxy that it pays a guaranteed 10 percent yield on deferred compensation, 4.23 percentage points of which were deemed above market. That means it was using a market rate of about 4.8 percent which in itself is a risk-free yield many investors would be happy to take.
Why would a company voluntarily pay more than twice the market rate?
The problem is that ideas with a logical business justification often get exploited for unintended purposes. The same would seem to hold for deferred compensation plans, which make sense in basic concept.
Because the tax wallop can be harsh on a multimillion dollar salary, many companies allow their top executives to steer some of their pay or bonus into a deferred compensation plan to be withdrawn in later years, somewhat akin to a 401(k) retirement account. (In another very lucrative perk patterned against the world of 401(k) plans, many companies provide a matching contribution on a portion of the deferred compensation.)
But unlike a 401(k), deferred compensation plans are generally ''unfunded,'' meaning the company doesn't actually set aside the cash into a separate account which the employee can allocate among a selection of mutual funds.
Instead, deferred compensation is more like a loan to the company by an executive, with potential benefits for both parties. The company can use the cash for more immediate needs, while executives can postpone the income tax liability until a time when they are retired or earning less.
Since the company derives a benefit, and the executive can't invest the money like a 401(k) saver, it's perfectly logical that the company should compensate the executive with interest.
It doesn't make economic sense, however, for a company to pay in excess of the going rate it might pay on a normal bank loan.
Nevertheless, it's become one more way that many companies seem determined to reward top executives who are already well-paid by any normal yardstick.
Bruce Meyerson can be contacted at bmeyerson(at)ap.org
Peninsula Clarion © 2015. All Rights Reserved. | Contact Us