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June 23, 2006


Michael Blowhard writes:

Dear Blowhards --

Anyone whose blood pressure is a little low could certainly do worse than pick up a copy of today's Wall Street Journal, which features an excellent and outrage-provoking article by Ellen E. Schultze and Theo Francis. The article's gist: Even as many companies are pruning back or terminating conventional pension plans, pension plans for top executives are growing more deluxe and expensive. Though the rationale for cutting back trad pension plans is that companies simply can't afford them any longer, many of those same companies are piling up ever more in the way of financial obligations to their executives. Oh, and btw? These liabilities require supersonic accounting skills to tease out.

Since I can't find the article online, I'll pass along some of its more gasp-inducing facts:

  • While pensions for grunt-level employees generally replace 20-35% of the employee's final salary, pensions for top executives often replace 60-100% of the executive's salary. Schultze and Francis compare the financial fates of two AT&T people. CEO for a grand total of five years, David Dorman will receive a pension of $2.1 million a year -- 60% of his salary. Ralph Colotti worked as an accountant for AT&T for 33 years. His pension: $28,800 -- 33% of his final pay.

  • Pfizer chairman Henry McKinnell will receive a $6.5 million-a-year pension -- 100% of his pay level, and an $85 million liability for Pfizer. Edward Whitacre of AT&T will receive $5.4 million a year for life on top of a lump sum of $18.8 million -- a cost to AT&T of $84 million. William McGuire of United Health can look forward to a $5.1 million-a-year pension on top of a $6.4 million payout -- a liability to the company of $90 million.

  • Executive-pension liabilities make up a substantial portion of total pension liabilities at many companies. Some of the figures Schultze and Francis (and the accountants who helped them) dug up: "12% at Exxon Mobil and Pfizer; 9% at Metlife Inc. and Bank of America; 19% at Federated Department Stores Inc; 58% at insurer Aflac Inc." At some companies -- Nordstrom and Dillard's, for example -- regular employees don't even have pension plans, while high-ranking execs do.

  • Companies are under no obligation to report executive-pension liabilities separately in financial filings. This can produce strange bookkeeping illusions. An example: TimeWarner's filings make its pension plans look underfunded by 7%. Yet the plan for TimeWarner's regular employees is more than fully-funded. According to Schultze and Francis: "The shortfall is entirely due to a plan for highly paid employees. That one has a $305 million unfunded liability."

  • At Lucent, the pension plan for regular employees is so solidly in the black that earnings on it generated 82% of the company's profits last year. Yet an unfunded plan for Lucent's highest paid people had a liability of $422 million. The way Lucent's management is dealing with this puzzle? It has been cutting back pension and medical benefits for regular employees.

  • For tax reasons, most executive pension plans are unfunded; there's no money-bin set aside to deal with them. That means that payouts are made directly from the current bottom line -- which in turn means that executive-pension expenses hit companies far harder than do employee pensions. An example is, again, AT&T. The company's payout this year to 1000 retired executives was responsible for 45% of AT&T's pension expenses. The other 55% of those expenses covered 189,000 people.

  • While companies are generally free to alter employees' pension plans at will, executive pensions are often protected from any kind of interference.

Our beloved elites, eh? I understand bargaining for a good deal. If I were in any kind of power position, I'd do so too. What I fail to understand is conducting affairs in a way that's guaranteed to produce outrage, resentment, and disloyalty. Do our elites want to kill the goose that laid their golden egg? And what are we expected to make of people who seem to see the companies (and the country) that made them wealthy as nothing more than conquered cities to plunder?



UPDATE: Randall Parker looks at a new Brookings Institute report that concludes that America's middle-class is shrinking.

posted by Michael at June 23, 2006


Did you see the article on America's growing income inequality in the current Economist? According to what I could glean from this rather weak story, the news is pretty much what I thought before: to wit, that the increase in American inequality is largely to outcome of immigration (on the low end) and corporate CEOs receiving outrageous compensation (on the high end.)

Astonishingly, the Economist article claimed that increasing CEO compensation was the result of international competition for the best business talent, citing the fact that two (2!) large firms have CEOs who are not of the same nationality as the firm. Somebody should tell the staff of The Economist that the plural of anecdote isn't data.

Clearly the real problem with CEO compensation is that it is set by the CEOs themselves, or by committees made up of people nominated by the CEO. The problem has gotten much worse, of course, since the advent of stock options, which allow CEOs to profit if their company's stock hits certain targets. That's a pretty good bet: heads I win, tails I just keep my already bloated salary! Don't you just love this job!

The pension shenanigans you report are just one more element of this grotesque situation.

Before anyone accuses me of left-wing bias, let me hasten to point out that I would have no problems at all with a CEO making tons of money honestly speculating in his own stock, if he was at risk of losing money from poor performance as well as making money from good performance.

All of this is just one more example of the basic dysfunction of the split between management and ownership of publicly held corporations. The managers have control and basically rape their shareholders, who of course are the ones actually bearing the risk of poor performance on the part of the managers. Every economics professor knows what a scam this is; it's been a staple of business school professors for decades.

The managers defend their piratical behavior by claiming when the company's stock goes up that they have personally have made their investors lots of money, conveniently forgetting that only something like 10% of a company's stock price reflects its individual financial performance (the other 90% reflects the overall movement of the market and the performance of the sector. Of course, when the stock goes down, management generally invites disgruntled investors to sell their stock and invest elsewhere. Unfortunately for this latter argument, all public companies pull this b.s., so investors really have nowhere to go.

And to think people call this capitalism!

Posted by: Friedrich von Blowhard on June 23, 2006 2:40 PM

And don't forget, Michael...these are the same bozos who want open borders.

Posted by: Charlton Griffin on June 23, 2006 2:52 PM

I am not defending the practices that you mentioned in the article, but here are a few thoughts on the subject:

- Many companies now understand that having one or two brilliant people at the top can make a difference in having BILLIONS in profits, or massive losses.

- Many large companies usually grow or shrink on one or two decisions (or sales, depending on the business)

Some examples of successes, Jack Welch at GE, Carlos Ghosn at Renault/Nissan, Alfred P. Sloan at GM, etc. A single person meant all the difference. A similar things can be seen with Money Managers (i.e. Peter Lynch, John Bogle, etc)

The number of examples of people who sent a company down the tubes seems endless.

Again, I am not excusing anything here, but there is a reason as to why so many companies (and boards) focus there attention and resources on one or two people.

Posted by: Ian Lewis on June 23, 2006 3:01 PM

The solution is to stop working for these bastards and go to farming. Really. The Amish and Mennonites don't have these problems. We'll see how many billions of dollars the one or two decisions made by these brilliant supermen create when the thousands who toil for them no longer do so (and when there are no pensions to raid).

(Pension raiding is a form of theft. The employee signed on partly under promises of a specified pension. To work for years and then have that carpet pulled out from under you - well, there is a reason certain people live in gated communities, employ bodyguards, and maintain foreign passports.)

Posted by: DR on June 23, 2006 3:46 PM

The statement that "having one or two brilliant people at the top can make a difference in having BILLIONS in profits, or massive losses" doesn't have a lot of statistical weight behind it. I suppose it can make a difference--but how "brilliant" are most of these CEOs, and how many billions in profits can be attributed to their brilliance alone?

Welch at GE is a case in point. I've read numerous articles debunking his contribution to GE's success--that in fact the groundwork for his success was laid by his predecessors, and he rode the wave of their good judgment (and then of course wrote books taking credit for it). Having worked at several corporations over the years, I can say from personal observation that it's never been the case that a single person at the top made all the difference. Any corporation is a network of decision-makers and implementers, working together--the effective ones drive the company. Many of these CEOs parachute in for a few years, and during that period the company's fortunes rise and fall based on decisions made years before they came on board. Then they move on, pocketing millions, before the consequences of *their* decisions are fully known.

CEO compensation in this country is outlandish and appalling, and is sustained for the reasons outlined by FvB. But a big question is, why do American workers put up with it?

Posted by: Steve on June 23, 2006 4:46 PM

Today's robber barons make the 19th century variety look like amateurs. The argument that their compensation is simply a matter of market factors, supply and demand for good CEOs, is ludicrous. It's a good old boys club, as the New York Times has assiduously pointed out in recent excellent pieces. There is a disconnect between compensation and performance.

And it's the stockholders, the owners, who get shafted along with employees.

Posted by: Richard S. Wheeler on June 23, 2006 5:28 PM

Perhaps American workers put up with it because they are distracted from the large-scale economic larceny that is going on by a political debate that continually emphasizes minor wedge issues like affirmative action, so-called "PC", racism, homosexuality, etc. How you feel about stuff like the pension practices outlined in the Wall Street Journal article cited should have a *much* greater effect on whether you consider yourself liberal or conservative than blustery but meaningless patriotic rhetoric, or the admittedly annoying theories of a small minority of radical left professors. But somehow it doesn't seem to.

The big reason to be a liberal in a capitalist society is that given time the wealthy will rig the system to their advantage. They can get away with doing a lot of damage before they are called to account, if they ever are.

Posted by: MQ on June 23, 2006 5:30 PM

I'm neither appalled nor gratified by the numbers you report. I suspect that high salaries for executives, like any salary for any employee, are sometimes justified and sometimes not.

That said:

"For tax reasons, most executive pension plans are unfunded; there's no money-bin set aside to deal with them. That means that payouts are made directly from the current bottom line...."

This strikes me as the good news, not the bad news (at least as long as the impact is reported). Since the money doesn't come from the same bin, it is easier to disaggregate these payouts from the general pension numbers and make stock purchase and sale decisions accordingly.


"While companies are generally free to alter employees' pension plans at will, executive pensions are often protected from any kind of interference."

It is my understanding that this is only true of prospective benefits. That is, you can arbitrarily change the rate of accrual of benefits, but once the benefits are accrued, they are an obligation on the company. At the very high end, executives are often working on contract and compensated at whatever rate they have negotiated. I generally despise long-term labor contracts, as I see them as a disincentive to effort, but that affects only what decisions I might make in signing such contracts, not the obligations of the company that signed them.

As Friedrich notes, the big problem here is self-dealing, which is to say "conflict of interest". But this isn't just a problem with corporations; limited partners have the same problem in partnerships where the general partner or partners set their own compensation(s).

Remember that buying stock is just buying a minor piece of a company. I guess the secret is not to go into business with people that aren't trustworthy. It's not really any different whether you're planning to buy into the nearest Baskin-Robbins franchise or General Motors.

Posted by: Doug Sundseth on June 23, 2006 5:41 PM

Social issues are a wonderful distraction, aren't they? But doesn't it feel like the debate over "gay marriage" is some kind of a decadent dead-end for wedge issues in general? I mean, these wedge issues are getting more and more marginal and outre, aren't they?

I have a feeling that the coming retirement crisis is going to blow away a lot of these petty concerns. As the era of employee pensions dwindles away, studies show that people are not saving nearly enough in their 401Ks. What happens when they retire? People are starting to think along these already, which is why Bush's proposal to do away with the guaranteed retirement income provided by Social Security went nowhere.

Another hot button issue is health care. Companies are scaling way back on how much they're willing to pay for employee health care, and folks aren't happy about it. Economic issues will have their day.

Posted by: Steve on June 23, 2006 6:00 PM

No, MQ, I don't think you get it. The socialists are strangling the regular people in this country too. They're both ruining the country, the socialists and the capitalists. The socialists are sucking the middle class dry through taxation and regulations which drives business away, and destroying the culture. They are the left hand on our throats. The capitalists are also sucking the middle class dry through outsourcing of jobs, insourcing of labor and open borders, and excessive compensation, and destroying our culture through their advertising and promotion of total garbarge, simply to make a buck. They are the right hand on our throats. Together, they are strangling the hell out of us, and they will destroy us unless we put a stop to it.

The ironic thing about the excessive compensation packages of the last 20 years or more is that they have come when the average person has become the shareholder through the use of 401k's and the popularization of mutual funds for investing. It seems that the mutual fund companies don't really care much how the corporations are run as long as the stock price goes up. They don't even care about that so much, as long as they get a fee. They only care it you leave the fund.

Another bit of ugly news is that a trend has also started of corporations borrowing vast sums of money for stock buybacks. Why? Because if the company's profits are stagnant, or look to take a nosedive in the near future, the CEO's stock options will suffer. So they borrow money, buy back stock, and then the same profit turns out to magically produce more earnigs per share, keeping the stock price trending up, and saving the value of the options. Just the minor problem of increasing the indebtedness of the corporation, with no productive value gained by the borrowing. Sweet!

Posted by: S on June 23, 2006 9:57 PM

The entitlement mentality of the American overclass is disgusting. May well be the end of us.

Fun fact: guess what the top executives at Toyota make? A little over $500k a year. Nice, but not jaw-dropping and decadent. Toyota seems to be able to compete in the global market pretty well too.

Posted by: Brian on June 23, 2006 10:10 PM

We really do need changes in regulations for corporations that make boards of directors more independent of CEOs.

I do not buy the argument that these CEO salaries represent market forces. If that was the case then CEOs running corps poorly would not make so much money.

Posted by: Randall Parker on June 24, 2006 2:31 PM

I agree with Brian. It isn't that it is unimportant to have talented people at the top---it's that I've never seen a CEO who had dollar-for-dollar impact on the company that matches the stunning level of compensation they receive. For example---revenue growth is often a key factor in driving the stock price. Well, any CEO will hear that from stock analysts. Some CEO's are smarter at figuring out how to set up a company to grow revenues than others, but they aren't directly responsible for generating many of those dollars---they've just gotten the company out of the way of their most talented workers so they can generate revenues. How exactly does the CEO then earn 248 times what their best salesperson earns?

Posted by: annette on June 26, 2006 3:10 PM

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