Retirement Heist: how companies plunder and profit from the nest eggs of American workers

It also needed it to pay the executives who helped engineer the retiree cuts. The year of the Schacht road show, Lucent’s cash payments to its top five executives totaled $12.5 million. That was roughly the amount of benefits paid for health care for 3,396 retirees and their dependents that year.

The following year—for the very first time—Lucent actually had to shell out something for the benefits of its 129,000 retirees: It paid $159 million. To put this figure in perspective, it also paid $300 million in executive bonuses. Schacht later defended the bonuses, saying it was necessary to pay competitive compensation to executives, “because that’s what it’s going to take to continue to attract and retain the talent required to build this company back to where we want to go.”

The spin job didn’t stop. In a financial filing discussing its pending merger with French telecom giant Alcatel SA in 2005, Lucent referred to its “costly” retiree plans and said that the combined company might have to take steps to reduce those costs.

It didn’t mention that the pension plan, which by then covered 230,000 retirees and employees, was again so flush that it pumped $973 million of noncash income into Lucent’s earnings in fiscal 2005—about 82 percent of the company’s pretax profit for the year. The only U.S. pension creating a drag on earnings was the supplemental pension for its 2,500 executives—its liability had grown to $422 million.

In 2005, Russo was awarded $3.6 million on top of her base salary of $1.2 million, and was granted an additional $8.7 million in restricted stock and options, a total of $13.5 million in 2005, a year the company would have been unprofitable were it not for the gains from its pension.

Lucent continued to benefit from the retiree plans. It used another $2 billion in pension assets to pay for retiree health care, and when it merged with Alcatel in 2006 to become Alcatel-Lucent, it still had a dowry of $5 billion in surplus pension assets.

The new French owners of the portfolio of American retirees continued to benefit from their investment: Alcatel-Lucent continued to pick away at the benefits. Thanks to gains from benefits cuts, plus pension income, the pension plan generated $1.7 billion in income in 2007, without which the company would have reported a loss of $1 billion. Alcatel-Lucent executives achieved their performance targets and were awarded their bonuses.

In 2008, Lucent eliminated its prescription drug plan for salaried retirees altogether, which generated $358 million in income. Russo stepped down at the end of the year, taking with her $8 million in severance.

In October 2009, the company froze the pensions of its 11,500 management employees. Their loss was Alcatel-Lucent’s gain: a $531 million boost to profits.

CHAPTER 6

Wealth Transfer: THE HIDDEN BURDEN OF SPIRALING EXECUTIVE PENSIONS AND PAY

WHEN HENRY SCHACHT was delivering the bad news to Lucent retirees, there was one retiree in the room who wasn’t going to feel the pain. That was Schacht himself. As a former CEO, Schacht had accrued a small fortune, joining the club of executives with enough retirement wealth not only to retire to an island but to buy it.

While Lucent and other companies were cutting benefits for hundreds of thousands of retirees to the bone, they were lavishing increasingly enormous sums on top management. This isn’t simply an issue of disparity; it’s a transfer of wealth. Billions of dollars earmarked to pay pensions and health care benefits to retirees were consumed, one way or another, by management teams who profited from the short-term income lift these maneuvers generated.

The dismantling of retiree plans did something more than boost profits. It helped fuel the growth of a parallel universe of executive pensions and benefits. Largely hidden, these growing executive retirement liabilities are slowly replacing pensions and retiree health obligations on corporate balance sheets.

The retirement party got started in the early 1990s when Congress, in a futile attempt to rein in executive pay, capped the tax deduction a company can take for an individual’s salary at $1 million. Undeterred, managers and compensation consultants simply recharacterized a lot of compensation as “performance-based,” which isn’t subject to the deduction cap.

Compensation committees maintained that tying executive pay to performance would incentivize managers to do a good job. Whatever it may have done, executives with mountains of stock options and awards were motivated to boost earnings, whether that was accomplished by improvements in productivity, layoffs, offshoring operations, creative accounting, or cutting benefits.