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

Awarding a substantial bonus to executives who are on the verge of retirement or departure can also generate a huge pension windfall. One of ExxonMobil’s two supplemental pension plans for executives calculates executive pension benefits using the three highest bonuses in the five years prior to retirement. A well-timed bonus can make a big difference. A $4 million bonus to CEO Rex Tillerson in 2008 pushed the total value of his pension up by $8 million in a single year, to $31 million. “By limiting bonuses to those granted in the five years prior to retirement,” the company states blandly in its proxy filing with federal regulators, “there is a strong motivation for executives to continue to perform at a high level.” It also encourages top management to make some shortsighted decisions, because a large award can lead to bigger pension benefits for the rest of their lives.

Awarding additional years of service, a practice that compensation watchdogs have perennially snapped at, is alive and well. PG&E, the giant West Coast utility, awarded its CEO, Peter Darbee, an additional five years, which boosted his pension 38 percent to $5.2 million in 2008. The company said it was doing this because it felt that his pension was less generous than what other executives were receiving. This kind of peer pressure drives executive pay and pensions steadily higher. That same year, the compensation committee of Constellation Energy awarded its chairman and CEO, Mayo Shattuck, an additional 2.5 years of service, boosting his pension by $10.3 million, a 97 percent increase.

Executive pensions have another characteristic that has been widely criticized in public pensions: Employers have an incentive to boost the benefits and hide the growing (unfunded) liability. In contrast, when it comes to rank-and-file pensions, employers have an incentive to inflate the liabilities and cut benefits.

Using unrealistic (and sometimes undisclosed) assumptions to estimate the executive liability can shrink it substantially. Some companies assume that executive salaries don’t rise; others, like Towers Watson, calculate the executive obligation using an unusually high discount rate, 7.5 percent in 2010, which results in a lower reported liability.

Companies can delay reporting some of the liability by waiting until the executive is headed out the door to apply some feature that inflates the total payout. A small change in the interest rate used to calculate a lump sum payout, for example, can increase a pension by millions of dollars.

In 2008, Goodyear Tire & Rubber adjusted the interest rate and compensation assumptions it used to calculate top executives’ pensions, which increased chief executive Robert Keegan’s pension by $6.3 million, to a total of $17.5 million. (The company earlier credited him with eighteen additional years of service, which has boosted his pension by $10.5 million.) At the end of that same year, Goodyear froze salaried employees’ pensions, saying its obligations under the plans were so onerous that they “could impair our ability to achieve or sustain future profitability.”

Joel Gemunder, the CEO of Omnicare, a provider of pharmaceutical care for nursing homes, had amassed retirement benefits worth roughly $91 million by the time he retired at age seventy-one in 2010. As lofty as that figure was, it got even bigger when he left. His retirement triggered immediate vesting for his stock options and restricted shares, which were worth more than $21 million, and he received $16.2 million in cash as a severance payment. Small perks included payments for tax and financial planning ($134,250) and “executive bookkeeping services” ($27,500). Altogether, the total retirement payout was more than $130 million. And ordinary Omnicare workers? Their pensions were frozen years ago, and in 2009 the company imposed salary cuts even as it reported record profits.

The pension and deferred-comp tables included in annual proxy statements provide a limited snapshot of the value of a top manager’s benefits. But these amounts aren’t what the person is likely to receive. Those numbers are tucked away lower down, under various provisions, such as “voluntary retirement” or “disability.” If someone relied on the pension table in Wells Fargo’s proxy statement, they might conclude that president John Stumpf’s pension in 2008 was $9.6 million, a 3 percent decline from the prior year. But elsewhere, the filing notes that the value of the pension he would receive if he left spiked to $17.7 million from $11.2 million—a 58 percent increase.