The secret pensions of fat-cat executives

By Liz Pulliam Weston

The very rich may or may not be different from you and me, but corporate executives certainly are -- especially when it comes to their retirement plans.

In addition to big salaries, fat bonuses and rich stock-option packages, top company leaders enjoy generous pensions that are often packed with perks not available to the rank and file.

Sometimes the details of these retirement plans become headline news, thanks to a particularly nasty divorce or a tussle with regulators, or both.

In September, for example, General Electric settled with the Securities and Exchange Commission for failing to adequately detail the retirement perks lavished on former Chairman Jack Welch, who retired in 2001. Welch's lifetime benefits, which were first revealed by his soon-to-be ex-wife Jane in divorce filings, include:

• Unlimited access to company jets, which the SEC says amounted to $1.2 million in Welch's first year of retirement.

• Exclusive use of a New York City apartment worth $50,000 a month.

• A chauffeured limousine and a leased Mercedes-Benz.

• Offices in New York and Connecticut.

• Free consultations with estate-planning and tax advisers.

• A personal assistant.

• Television, fax, phone, computer and security systems at his four homes.

• Bodyguards for his speaking engagements and book tours.

The SEC estimated the total package was worth $2.5 million in the first year alone and said GE should have disclosed the details in its annual reports.

How they keep it quiet

All too often, though, it's easy -- and legal -- for companies to bury the particulars of their executive pension and compensation plans. Some information is disclosed only in fine print on footnotes in proxy statements, while other details don't have to be revealed at all. If a perk costs the company less than $50,000 annually or makes up less than 25% of a compensation package, SEC regulations don't require disclosure.

Investor advocates say companies are becoming increasingly skilled at using vague SEC regulations to hide and downplay compensation details, making it tough to discern who gets what.

What is known about executive pensions is more than enough to illustrate the huge gap between corporate leaders and their underlings. Here's just a taste:

Pumped-up contributions. The maximum company match for a 401(k) is typically 3% of the worker's salary -- and that's if the worker contributes 6% or more.

Executives, by contrast, typically don't contribute to their version of a 401(k), known as a deferred compensation plan. Instead, all the money comes from the companies -- which often contribute 5% or more, said Janet Den Uyl, compensation expert for Mercer Human Resource Consulting.

Tyco International, for example, tucked $268,540 into the deferred compensation account of Richard J. Meelia, the president of its health care arm -- or about 14% of the $687,191 in salary and $1.19 million in bonuses Meelia was paid last year. Tyco's contribution for Chairman and CEO Edward D. Breen was slightly less rich: $251,665 on salary and bonuses of $3 million.

Guaranteed returns. Your 401(k) may swoon or stagnate, depending on market swings, but your company's top leaders may enjoy guaranteed minimum returns.

Enron's minimum was notorious: Executives who contributed salary and bonus money to its deferred compensation got an assured return of at least 12%.

Lucent's executive deferred compensation plan used to be similarly generous. Cash balances in the accounts accrued returns equal to five percentage points more than the prevailing 10-year Treasury rate. Recently the company eliminated the five-point bump, but execs still get relatively rich returns on their money since the 10-year T-Bill currently yields more than 4%. Compare that to the 1% or 2% your cash balances earn.

The last time Mercer surveyed companies on executive retirement plans, in 1998, about half the companies that had deferred compensation for their leaders also guaranteed a minimum return. That percentage has probably fallen somewhat in recent years, Den Uyl said, as companies focus more on stock-based compensation.

Shielding the spoils

Protected plans. Delta Air Lines successfully pushed its pilots into agreeing to $1 billion in wage, benefit and pension cuts to help stave off bankruptcy. At the same time, the airline moved the pensions of its top executives into trusts that would preserve the funds in case of a Chapter 11 filing.

At most companies, the pension money would have remained a corporate asset -- and subject to seizure by creditors. Transferring the money to the bankruptcy-proof trusts typically triggers big tax bills for the executives, so Delta inflated the amounts to compensate for the extra taxes. Other troubled companies that have created similar trusts for executives include UAL Corp., parent of bankrupt United Airlines, and defunct steel concern LTV Corp.

Lifetime life insurance. For awhile, split-dollar life insurance arrangements were all the rage among well-heeled executives. Companies paid the premiums for enormous policies that ultimately benefited the executives' heirs. Cendant, for example, paid about $4 million a year for a $100 million policy on CEO Henry R. Silverman.

The Treasury Department pulled the punch bowl on the split-life party when it nixed some of the more lucrative tax benefits from these arrangements. But many companies were still making huge payments last year as they shut down the arrangements or looked for alternatives. Cendant, for example, coughed up $4.6 million in 2003 for Silverman's policy.

Free advice. The sum total of your retirement plan education may have been an hour long seminar about your 401(k) choices -- or just a colorful brochure with lots of pie charts.

Your corporate leaders, by contrast, may have been reimbursed for the professional advice to plan their retirement, arrange their estates -- or even negotiate their pay and benefit package. Former United Airline's Chairman James Goodwin was paid an extra $47,000 to cover financial planning advice in his last two years on the job, but that sum pales against the $203,113 Cendant's Silverman received to compensate him for legal fees incurred while he was wrangling with the company over his employment agreement.

The actual fees, by the way, were somewhat less than $200,000 -- Cendant "grossed up" the amount, making sure that Silverman had enough money to pay the taxes incurred on this particular perk.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.