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Snow Job : A Compensation Tale

Secretary of the Treasury nominee John Snow got a platinum parachute from former employer CSX. But if confirmed, how will he deal with compensation...
Lisa YoonDecember 17, 2002

Getting paid just for showing up sounds like a sweet deal. But does it beat getting paid well after your days of showing up are over?

According to a report in the New York Times, arranging for healthy pay checks even after you’ve quit working, is the newest rage in executive compensation. Usually called a salary continuation agreement, it’s really another form of severance or retirement benefits.

Former General Electric Co. chairman Jack Welch was the last high-profile business chief to face the glare of the public for his retirement perks, which seemed questionably lavish to some critics. The latest corporate boss to cash in upon leaving: Treasury secretary nominee John W. Snow, who stands to receive pension benefits worth 44 years of service to CSX Corp., though he’s only worked there 25, reports the Times. Moreover, says the paper, Snow’s benefits will be based not just on his salary, or even his salary and bonus, but also the value of 250,000 shares of stock the CSX board gave him.

Snow gave up his claim to about $15 million in severance benefits from CSX. Still, through his pension upgrade, he’ll get $2.47 million a year from his old employer until he dies, according to company disclosures. If confirmed as Treasury secretary, his new gig will pay $161,200 annually.

It’s no news that top executives receive cushy benefits when they leave their companies—regardless of whether they retire or leave to “pursue other opportunities.” What’s new is that retirement benefits and severance packages are getting bigger. A recent survey 925 human-resources executives by career consultancy Lee Hecht Harrison reported that 47 percent of the survey participants said they changed their severance policies in the past three years. Interestingly, of these companies, 68 percent said severance rules became more generous.

What’s behind this trend towards platinum parachutes? Two trends: receiving credit for years not worked, and allowing virtually all compensation to count toward pension benefits, Judith Fischer, managing director of Executive Compensation Advisory Services, told the Times. She calls such deals “the eternal wealth syndrome.”

The Times also points out that as Treasury Secretary, Snow would be in the middle of pension policy-making as the subject heats up in Washington. First order of business: overseeing new pension rules announced by the Bush administration that, according to some experts, will strip benefits from older workers while benefiting younger workers and saving companies money.

How? Reportedly, the new policy will make it easier for companies with traditional defined-benefit pensions, which pay a monthly sum to retirees for life, to shift to so-called cash balance plans. Under the traditional plans, pension benefits are primarily based on a worker’s final, and usually highest-paid, years of employment.

Cash balance plans, by contrast, build benefits evenly over the course of a worker’s career. That makes them a boon to younger workers, but critics say older workers could lose as much a third of their benefits.

Most rank-and-file workers with traditional pensions receive one year of credit for each year of service, and only their salary counts in determining benefits. Many executives, including Snow, can also count their annual bonuses.

More unusual, says ECAS’s Fischer, is the provision in Snow’s pension arrangement that takes into account the value of 250,000 shares of stock he received from the company. That was intended to match his purchase of an equal number of shares with his own money since 1999. As noted in Securities and Exchanges Commission filings, the super-size CSX benefits—which are extended to fewer than two dozen executives—are supposed act as an incentive for the small group of officers to “exert maximum efforts for the company’s success” and stay with CSX until retirement.

Experts say that part of the reason for increase executive pensions is to offset the risk that they will go unpaid in a corporate failure, reports the Times. That’s because, unlike pensions for ordinary workers, executive plans aren’t guaranteed by the government.

In Snow’s case, his compensation package substantially increased over the last five years, despite the company’s deteriorating financial performance. According to company filings, his total pay package rose 69 percent, to $10.1 million last year from just under $6 million in 1997. Meanwhile, the stock fell 53 percent from its 1997 high.

Back at CSX, the company may have some public-relations problems to handle: The company is being sued by 41 retired workers who toiled at the railroad’s posh Greenbrier hotel and country club in West Virginia. The retirees say their life insurance benefits were cut.

The company maintains that the employees were mistaken and that no such benefit ever existed.

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