Former Delta CFO Roeck contends that previous generations of management would never have contemplated what the current one has done, and cites the airline's previous financial difficulties as an example. "When we went through pay cuts in the early 1990s, it went without saying that they would apply to us," he says.
Off-Limits
Some consultants contend that companies should not have set up supplemental plans in the first place without funding them. "Had AMR set aside funds on a consistent basis when it first implemented the plan in the 1980s, it would not have had to take the financial and PR hits that it did," says Mel Todd, president and chief executive officer of The Todd Organization, a national executive-benefits consulting firm headquartered in Greensboro, North Carolina.
Al Becker, a spokesman for AMR, concedes as much. "In retrospect, we might have done things differently," he admits, though he points out that the problems now facing the airline industry are unprecedented.
Once a plan is funded, however, it's off-limits to creditors. And that means current management will get its benefits even if the company goes bankrupt. Is that fair? Defenders of such plans note that nonqualified plans, unlike traditional defined-benefit plans, aren't covered by federal insurance. But, of course, that insurance covers only a portion of the promised benefits, and even the full amounts pale in comparison with what top managers usually expect from nonqualified plans. As Roeck puts it, "We're supposed to be in this together."
Adding insult to injury as far as public perception is concerned, companies often pay executives extra money to cover the tax liabilities that result from funding such benefits. Almost half of the $45 million in payment to the special Delta trusts compensated the executives for their tax liabilities. At Motorola, executive vice president and CFO Robert Barnett got $3 million in 2000 to "gross up" his benefits for taxes.
Such practices are also beginning to raise hackles among shareholder activists. Peter Clapman, chief counsel of institutional money manager TIAA-CREF, recently complained to Fortune magazine that nonqualified benefits for executives were being funded with no apparent connection to performance. Motorola is perhaps the most likely candidate for pushback from TIAA-CREF, as B. Kenneth West, a senior consultant to the organization, was recently named to its compensation committee.
Some people, like Thomas Roeck, doubt whether supplemental plans can be designed to align management's interests with shareholders'. With the senior executives' benefits secured, asks Roeck, "what incentive does management have to avoid bankruptcy and look out for other stakeholders?"
Legal Remedies
Congress, meanwhile, is at least threatening to enter the picture. A law enacted in 1978 bars the Treasury Department from issuing new rules for nonqualified plans on its own, and much of what is considered legitimate practice is based on court decisions that follow precedents derived from earlier rules. After examining apparent abuses at Enron, however, the staff of the Joint Committee on Taxation (JCT) recommended several legislative steps during hearings in April.
It's currently standard practice, for instance, for companies to allow distributions from such plans before retirement if an executive forgoes 10 percent of the benefit. That's in line with the penalty for early withdrawals from 401(k) plans and other qualified retirement plans. But such penalties did little to dissuade Enron executives from tapping their plans in this fashion not long before the company declared bankruptcy.
More than $53 million in early distributions from its plans were made to 127 former executives of the energy-trading company fewer than 90 days before its bankruptcy filing in December 2001. And the JCT staff claims that other companies, which it did not identify, impose smaller such "haircuts" on early distributions. The staff recommends that Congress tax benefits when plans allow early distributions, control over investments, or other elections by beneficiaries.
What's more, according to the JCT staff, some companies locate trusts designed to formalize such arrangements in offshore tax havens, putting them out of reach of both the IRS and creditors. In testimony before the Senate Finance Committee a year earlier, Kathryn J. Kennedy of Chicago's John Marshall Law School cited as cause for congressional action the increased use of offshore trusts and others designed to fund assets when trigger events such as a credit downgrade occur.
Trusts that fund assets based on a triggering event are used by fewer than 9 percent of all companies with nonqualified plans, according to Clark Consulting. But some experts nonetheless say that tightening some rules here is perfectly reasonable. Offshore trusts in particular are "clearly abusive," says Jim Hauser, a partner in Boston law firm Brown Rudnick Berlack Israels LLP.
But the JCT staff went much further by urging Congress to change the basic standard for allowing deferred compensation to be excluded from taxable income. Currently, taxes can be deferred as long as the recipient is not in "constructive receipt" of the benefits, under which unfunded arrangements typically qualify. The JCT staff recommended, however, that the legal standard be changed so that the amounts would be taxed unless the recipient could show that he or she remains "in substantial risk of forfeiture" of the amounts until they are received.
Reader Comments» Post a comment