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It's perks aplenty for those at the top

The chasm between the benefits offered to managers and rank-and-filers grows as companies offer executives everything from larger life insurance policies to multimillion-dollar low-cost loans.

©Los Angeles Times
February 3, 2002

The lavish retirement plans, low-interest loans and other perquisites showered on Enron Corp. managers have put a spotlight on a growing corporate trend, one of ever-richer executive benefits packages whose costs often can be hidden from shareholders.

Compensation experts say companies are increasingly using executives' benefits packages, which already are far more generous than those offered to regular workers, as a way to quietly beef up pay for top managers regardless of how their company performs.

Sumptuous paychecks for executives are nothing new. But shareholder activists say weak regulatory requirements, along with a faltering stock market, are leading to unchecked growth in executive retirement plans and other benefits even as regular workers face losses and cutbacks in their own plans.

"The trend has been (for executives) to be greedier and greedier, even though there's a recession," said Cynthia Richson, director of corporate governance for the State of Wisconsin Investment Board. "All this is designed to keep executives whole while the rank and file loses ground."

As many workers' 401(k) retirement plans shrink, executives at some companies get guaranteed returns on their investments. Other companies pour hundreds of millions into special executive-only retirement accounts. Companies also pay for big insurance policies and offer executives multimillion-dollar loans, complete with below-average interest rates and a company promise to forgive some of the payments.

Unlike salaries, bonuses and stock options, which must be laid out in government filings, the true cost of these benefits is often difficult, if not impossible, for outsiders to determine, said Ken Bertsch, director of corporate governance for TIAA-CREF, the world's largest pension fund manager.

For a variety of accounting and regulatory reasons, companies often are not required to report the price tag for many of their executive benefits to the Securities and Exchange Commission. When benefits are disclosed, their costs often are tucked into footnotes or lumped into a catch-all category of "other compensation," said Nell Minow, editor of the Corporate Library, which tracks compensation trends.

The costs of many executive retirement plans are particularly easy to hide, since companies have to reveal few details, compensation experts said.

"The regulatory disclosure rules are so weak, (companies) can get away with one or two ambiguously worded sentences in the middle of a paragraph about the rank-and-file (retirement) plan," Richson said.

These feeble disclosure requirements, combined with poor stock market performance, have spawned a cottage industry in the past year of compensation consultants who are promoting supplemental executive retirement arrangements, benefits experts said. These plans are designed and promoted specifically as a way to enhance compensation that's "off the radar screen of shareholders," Richson and other compensation experts said.

Unlike stock options or bonuses, which are tied to the company's performance, executives benefit from these supplemental retirement plans whether or not the company does well.

Executives can lose these retirement benefits if the company declares bankruptcy because the plans are not protected by the government-run Pension Benefit Guaranty Corp. But shareholder activists say most executives are at little risk, since relatively few companies actually go broke.

Companies say they need to offer ample benefits to attract and retain top-flight managers. In addition, many of the plans designed for rank-and-file workers don't provide enough retirement pay for executives used to living on much higher salaries, compensation consultants said.

Traditional pension plans limit benefits to executives with high six-figure incomes, because the plans can take into account no more than $200,000 of salary when determining benefits. The IRS also requires companies to cap the 401(k) contributions of their highest-paid workers, so many executives are prevented from making the full $11,000 annual contributions the law otherwise allows.

About 60 percent of the executive retirement plans that compensation consultant William M. Mercer Inc. surveyed in 1998 simply made up for the benefits that would otherwise have been lost to IRS rules, said Janet Den Uyl, head of executive benefits and compensation for Mercer.

The 40 percent of companies that offer richer plans, either to all their executives or to their top one or two leaders, often are trying to lure talent from other companies or prevent defections, Den Uyl said.

The richest arrangements of all, not surprisingly, are aimed at the companies' top leaders.

"There's more license at the CEO level," Den Uyl said. Most CEOs already have rich compensation packages, "and they're not ready to throw those away" when hired by a new company.

Here are some of the nonsalary perks companies have made available to top managers:

GUARANTEED RETURNS ON INVESTMENT. Top executives at Enron could contribute salary and bonuses to so-called deferred compensation accounts with guaranteed minimum annual returns of 12 percent. Struggling telecom-equipment giant Lucent Technologies Inc. has a similar plan that promises to pay 5 percentage points more than the 10-year Treasury rate. Currently, that Treasury rate is about 5 percent, which means Lucent executives in the plan get a 10 percent return on their investments.

Enron and Lucent are far from alone. About half the companies that offer deferred compensation plans provide a guaranteed minimum return, according to a Mercer study.

BIGGER COMPANY MATCHES. The typical company match for a 401(k) defined contribution plan is 50 cents for every dollar the employee contributes, up to 6 percent of the worker's salary. For a worker who takes full advantage of the company match, the employer's contribution represents 3 percent of his or her pay, or $1,500 a year for a worker making $50,000.

The company contribution for an executive version of a 401(k) is typically 60 percent higher. The average company contributes 5 percent, and nearly half of the companies surveyed contribute even more, the Mercer study found.

The dollar amounts contributed can be substantial. Intel Corp., for example, contributed $1.3-million to the defined contribution accounts of its top five executives in 2000, including nearly $400,000 to the account of chief executive Craig Barrett, whose salary and bonuses that year totaled $3.4-million. But unlike many other companies, Intel doesn't limit this supplemental retirement plan to top executives. Intel makes such contributions for all of the about 10,000 employees whose ability to contribute to the regular 401(k) is restricted, Intel spokesman Chuck Mulloy said.

HUGE LOW-COST LOANS. SEC filings show telecom company Global Crossing Ltd., which filed for bankruptcy protection last week, made an $8-million loan to chief executive Thomas Casey in November 2000 and a $1.8-million loan to president David Walsh in March 2001. Both loans were secured by the executives' homes, but the interest rates they paid -- 6.01 percent for Casey, 4.75 percent for Walsh -- were 3 to 4 percentage points below prevailing rates on standard home equity loans at the time.

Enron chief executive Kenneth Lay frequently tapped a $7.5-million line of credit that he could repay with company stock that Enron had given him or that he had purchased with low-cost company-provided options.

LAVISH LIFE INSURANCE. Many workers get some life insurance through their companies, typically $50,000 or one year's pay.

Executives can get much more. About one-quarter of companies in the Mercer study have special executive life insurance programs that typically pay for coverage equal to three to four times the executives' annual pay.

COMPANY-PAID TAXES. Companies pay a variety of tax bills for certain executives. When a company's benefits are so great that executives incur a tax bill from the IRS, as they often do, companies often give executives money to pay the tax. Because that cash payment also incurs income tax, companies often add an additional sum to cover the extra tax, a process known as "grossing up."

Lucent chief executive Henry Schacht was given $57,325 to pay tax on "certain fringe benefits" in 2000, according to the company's SEC filings. Ray Iritani, chief executive of Occidental Petroleum, was reimbursed $486,918 for taxes in 1999 and $95,000 for tax preparation services, SEC filings show.

FRINGE BENEFITS. Other perks, such as the personal use of corporate jets, company-provided chauffeurs and company-paid financial planning, can add tens of thousands of dollars to an executive's total compensation.

The footnotes of Lucent's SEC filings, for example, show the company paid $26,351 for personal financial planning advice for CEO Schacht, in a year when he received a $1.1-million paycheck. At Enron, Lay's personal use of a corporate jet in 2000 was worth $334,179.

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