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When International Business Machines froze its pension plan in early January, thousands of its employees suddenly felt a lot less certain about their retirement security.
Samuel Palmisano, IBM chief executive, has no such worries. Palmisano, according to IBM's (IBM, news, msgs) regulatory filings, will receive an annual pension of $4 million when he retires at age 65. That works out to $75,000 a week -- or more than $10,000 a day, including weekends.
It's becoming a familiar theme, as witnessed by this week's announcement by Alcoa (AA, news, msgs) that it will not offer pensions to new hires. And as traditional pension plans disappear and are replaced by less-generous 401(k) plans, the very executives who cut those pensions are keeping their guarantees of retirement luxury.
In IBM's case, executives will reap the rewards of fat pensions that remain fat even as the company changes its rules. In others, high-ranking managers are given extra pension credit for time served. Some CEOs who are scaling back company benefits are guaranteed multimillion-dollar payouts when they leave, even if it's as a result of being laid off.
And there's another benefit to top executives: By cutting pensions, they make their companies more profitable, thus boosting their own bonuses. "It is unseemly for executives to reap higher bonuses on that basis," says Eleanor Bloxham of the Value Alliance and Corporate Governance Alliance, a Westerville, Ohio-based outfit that advises boards and companies on corporate governance issues.
But because big shareholders are not about to complain about a CEO making a company more profitable, these practices aren't likely to change anytime soon.
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Christopher Cox, chairman of the Securities and Exchange Commission, has promised to revamp disclosure rules to make it easier to figure out what kind of pensions and pay packages execs are getting from companies. And while that will help to show how lucrative executive pensions are, it won't close the gap between the retirement benefits of top executives and their employees.
A $3 billion cut
IBM said it would freeze its traditional defined-benefit retirement plans as of 2008. This means any additional benefits workers in these plans were hoping to accumulate after 2008 simply vanish. An IBM spokesman says the company has to roll back its more costly defined-benefit plans because so many competitors in the software sector don't offer them."It's outrageous. People are very upset," says Candice Johnson, a spokeswoman for the Communications Workers of America, which follows IBM pay issues because it is trying to form a union for IBM employees. "They feel that the rug was pulled out from under them."
To offset the damage, IBM employees will get improved 401(k) plans with higher corporate matches for worker contributions. But defined-contribution 401(k) plans don't offer the guarantees of a traditional pension. In a 401(k), workers kick in regular savings and manage their own investments. So the outcome depends largely on how much they can afford to set aside -- and how well they invest it. (Read here how IBM's 401(k) plan stacks up.)
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IBM's top brass is on better footing, even though IBM is freezing pensions for all of its executives, including Palmisano. Scott Klinger of Responsible Wealth, a group that tries to promote more equitable pay, says that it's "hard to argue that someone who is getting $75,000 a week is sacrificing or suffering in any way."
Palmisano's pension package is rich, even by CEO standards. The average expected annual pension for CEOs at S&P 500 ($INX) companies is $930,000, according to Paul Hodgson, an analyst at the Corporate Library and author of "Building Value Through Compensation."
It's not like Palmisano doesn't make enough to tuck a little away for his old age on his own -- like regular IBM workers will now have to do. IBM paid Palmisano $6.8 million in salary and bonus in 2004. That's well above the $2.46 million average for CEOs at S&P 500 companies, according to the Corporate Library. At the end of 2004, Palmisano also had $14 million worth of restricted stock and options potentially worth $12 million or more in 10 years, by the company's calculations.
Palmisano isn't the only IBM executive headed for a big retirement payout. Nicholas Donofrio, vice president of innovation and technology, can expect a $1 million annual pension at 65. Douglas Elix, vice president of sales and distribution, is on track for a $970,000 annual pension. His total pay package was worth at least $2.7 million in 2004. IBM's spokesman says the pay packages are commensurate with the executives' experience. Palmisano, Donofrio and Elix have each worked for the company for 31 years or more.
IBM estimates it will save $3 billion by 2010 because of the changes. "Any savings in the next several years from this action would be built into the annual plan," says an IBM spokesman. "So they don't start with a 'leg up' on their incentive payments because of this shift away from defined benefits."
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