Human Capital & Careers

Exec Comp Formulas Rejiggered

Some companies move to exclude pension expenses from exec comp formulas; during bull market, pension gains were included.
Jennifer CaplanJune 19, 2003

A number of companies — including General Electric, Delta Air Lines, and Verizon Communications — have started removing pension effects from executive compensation formulas. The reason? To ensure that executive bonuses don’t suffer because of a decline in plan returns, according to an article in The Wall Street Journal.

Over the last decade, as the stock market soared — and with it, the value of corporate pension plans — retirement plans helped boost the bottom line at many companies. And as overall profitability swelled, so too did executive bonuses and incentive compensation.

But even with the recent run up in the Dow Jones Industrial Average and S&P 500, sagging stock prices have turned pension plans into a drag on corporate profits. In turn, some corporate management teams have decided to leave the plans out of compensation calculations, cloaking the move under the guise of good corporate governance, according to The Journal. Indeed, companies that have begun excluding pension effects on exec comp have done so under pressure from shareholders and unions.

Some shareholder rights advocates say that the move to strip pension losses from exec comp formulas highlights an entrenched belief among many managers that large bonuses are an entitlement — rather than a reward for achieving outstanding performance.

“This pattern where pension surpluses are included for bonuses but pension expenses are excluded just underscores how these incentive programs can be manipulated in order to maximize payouts,” Carol Bowie, director of governance research at the Investor Responsibility Research Center, told The Journal.

This year, Delta’s compensation committee decided to exclude pension results from bonus calculations. For senior executives, the move was well timed. While Delta recorded pension income of $73 million in 2001, the airline recorded a pension expense of $155 million last year.

A company spokesman told the Journal that neither pension income nor expense had a substantial effect on company performance or bonus payments in recent years.

But critics say senior executive are too often keen to take pension effects out of compensation calculations when things are going sour, but are only too happy to include them when the stock market picks up.

CalPERS: Abusive Comp Must End

In a related story: CalPERS, the pension plan for public employees in California, is stepping up its pressure on companies with excessive executive compensation policies.

Under a new plan — expected to be introduced later this year — Calpers will rate compensation policies at 10 to 15 companies by comparing compensation and company performance to that of industry peers. CalPERS will also include total compensation for chief executives, as well as base salaries, incentive plans and restricted stock and options. The information will be published on CalPERS’ website.

“Poorly designed compensation packages are having a disastrous impact on companies and share owners by emphasizing short-term or self-interested behavior,” said Sean Harrigan, president of the Calpers board.

In addition to rolling out the rating system, CalPERS managers threatened to continue voting against “abusive” compensation policies in the 2004 proxy season. In particular, officials at CalPERS said they would vote against any plan that did not prohibit repricing of options or did not include a significant portion of performance-based components and long enough vesting periods. For CalPERs, that’s at least four years).

Managers at the giant pension fund also said they would vote against plans that contain evergreen provisions — riders that automatically increase the shares available for grants on an annual basis. In addition, managers at CalPERS are asking companies to improve disclosure of severance packages and other forms of compensation.

CalPERS holds approximately $138 billion in assets.

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