VideoUnder that standard, much if not most deferred compensation would be taxable even when unfunded and put out of reach only of new management, a practice now widespread through the use of so-called rabbi trusts. A change of that magnitude would mean "the end of nonqualified plans," warns Hauser. He also contends that so dramatic a revision of the rules isn't justified. "Enron was terribly aberrational," he insists. "Congress is using a blunt ax where precision surgery is required."
Judgement Call?
Other supporters of nonqualified plans maintain that given the bankruptcy rules, no legislative changes whatsoever are necessary. "These issues are best left to the bankruptcy courts," says Mel Todd. "Bankruptcy judges have broad powers and authority."
Maybe so, but critics note that the judges can use that leeway to overlook violations, and they cite Polaroid's bankruptcy as a case in point. Roughly $1.5 million in deferred compensation was paid to Polaroid insiders within the 90-day period prior to a filing when such payments are proscribed by federal law, according to court documents obtained by CFO.
Indeed, some observers say the bankruptcy code is too vague to deal adequately with deferred compensation and should be modified to specify a "claw-back" provision for abuses involving such distributions. "It may be difficult to otherwise prove that contributions to a secured funding vehicle are a fraudulent conveyance," comments Hewitt Associates consultant Dave Sugar.
Yet others contend that Enron's insolvency promises to change the legal climate for such claims. While that case has now dragged on for almost a year and a half, it's far from over, and many experts predict that creditors ultimately will go after questionable distributions there. "Everyone fully expects that to happen," says Todd. And however aberrational Enron's behavior may have been, Hauser notes that creditors are now hunting for similar behavior elsewhere.
All of which poses a paradox for companies in financial difficulty. On the one hand, many are looking to defer more executive compensation to increase free cash flow. But while stakeholders have an obvious interest in improved cash flow, an increasing number are opposed to the idea of deferring compensation to produce it. "There's no way to square everybody's interests here," says Sugar.
Ultimately, proponents of nonqualified arrangements fall back on a standard defense: the compensation, they say, is necessary to retain top executives at a time when their stock options are underwater and they're taking salary cuts along with everyone else. Yet in the current environment, managers of troubled companies are hardly in great demand elsewhere. "Where are they going to go?" questions a critic who asked not to be identified. "Who's going to hire them?"
The message for CFOs: Think twice about demanding such benefits under current conditions unless your performance is superior enough to justify funding them — or you're prepared to take the heat.
Delta Disappointment
Last February, in a letter sent to 30 retired executives who had demanded that the funding of special retirement plans for 33 of Delta Air Lines's current executives be rescinded, the company's general counsel stated that management was "perplexed and disappointed" by the request.
After all, wrote attorney Robert Harkey on behalf of Delta management, eight of the retirees said in an earlier letter that they wanted to be included in plans for the funding. What's more, he said, the value of the severance benefits they received wasn't much less than the $75 million earmarked for current executives.
But a lawyer for the retired executives says that there's no comparison between the severance payments and the retirement-plan funding. "There's no possible relationship," says Dean Booth of Schreeder, Wheeler and Flint LLP in Atlanta. For one thing, he says, the severance totaled "considerably less" than $10 million. And 22 of the signatories of the second letter received nothing. In contrast, CEO Leo Mullin could retire in five years and receive about $1 million a year for the rest of his life.
Booth also points out that the group changed its mind about wanting to be included in the funding because the members — including ex-CFO Thomas Roeck — didn't realize the extent of underfunding of the regular retirement plans' benefits. At first, says Booth, the group thought they were the only current and retired employees who weren't going to get paid. Once the extent of underfunding of the regular plans became clear, however, the retired executives realized 58,000 others also wouldn't get their benefits. In fact, says Booth, "the 33 would be the only ones getting the money."
That's an overstatement, to be sure — but only a mild one. In fact, Delta is proposing to phase out its traditional plan and replace it with a cash-balance plan expected to cut the pensions of older workers by as much as half.
Talk about disappointment.
Beyond Reach?
Most large companies now offer non-qualified deferred compensation (NQDC) plans or supplemental executive retirement plans (SERPs) to highly paid executives, according to a 2002 survey by Clark Consulting, an executive compensation consulting firm based in Dallas. While it's unclear what proportion actually funds the benefits, putting them formally out of reach of creditors, nearly half allow early withdrawals from NQDC plans for any reason, and a handful put the benefits of both types of plans into trusts designed to secure the benefits when a trigering event such as a credit downgrade occurs.
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