Else to the Poorhouse
that the war in Iraq has been declared officially over, can
the media please put aside their preoccupation with Scott
Peterson’s new hairstyle and focus their attention on the
sputtering U.S. economy?
And in a week when even Fortune, the corporate playbook,
has adorned its cover with a CEO with a pig’s head and the
title “Oink! CEO Pay Is Still Out Of Control,” how about starting
with the guys running corporate America? They have, after
all, in the course of the last year gone from American Idols
to America’s Most Wanted, the most stunning transformation
since Ozzy Osbourne morphed from a bat-chomping satanic rocker
into America’s cuddliest dad.
But no matter how battered their reputations may be, they
still appear determined to rescue themselves instead of their
sinking ships. For today’s captains of industry, the maxim
in a crisis seems to be: “To hell with the women and children—save
the lifeboats for us!”
Take American Airlines. While preparing to make a rough landing
in bankruptcy court, executives at the dead-broke carrier
extracted from workers $1.62 billion in wage and benefit concessions
the bosses claimed were needed to keep American aloft. At
the same time, the execs secretly safeguarded themselves with
a glittering array of golden parachutes, including massive
cash bonuses and a $41-million trust fund to guarantee their
pensions should the airline crash and burn.
Even after the secret escape plan was revealed and all hell
broke loose, the company held fast to its priorities. It canceled
the cash bonuses. It tossed CEO Don Carty onto the tarmac.
But it refused to relinquish the fund protecting its execs’
In the end, the executives kept their cushy trust fund while
the workers were forced to go along with a deal that will
lead to thousands of layoffs and pay cuts of between 15 and
21 percent. I guess in today’s business world, that’s what
amounts to a compromise.
In the clubby confines of America’s boardrooms, the sky is
the limit. Compensation committees are working overtime coming
up with ever more creative—and devious—ways to boost the earnings
of top executives. And supercharged pension plans are the
hot new trend.
Among the gimmicks being used to goose the value of these
plans is an accounting scheme that can dramatically increase
a CEO’s retirement windfall by adding phantom years—even phantom
decades—of service to the exec’s pension. In theory, it works
the same way as those jailhouse rules that reward a model
prisoner with time off for good behavior—only these guys get
rewarded no matter how many employees or shareholders they’ve
knifed in the back with a homemade shiv.
Thanks to this latest innovation in corporate accounting,
Leo Mullin, Delta Airlines’ CEO, has had an additional 22
years of service tacked on to the less than six years he’s
actually worked for the company, while US Air’s former CEO
Stephen Wolf was given credit for 24 years he didn’t really
put in. And this scam isn’t reserved for the high-flyers of
the airline industry. When John Snow left CSX Railroad to
become Treasury Secretary, he was given credit for having
put in 44 years at the firm, even though he’d actually punched
a time clock there for 25—a little fun with numbers that helped
him walk away with a cool $33 million in pension booty.
Corporate directors, who have come under increasing fire from
shareholders for approving excessive pay packages for high-level
executives, appreciate the fact that these pension plan adjustments
allow them to fly under the radar while continuing to funnel
millions to CEOs. Unlike salaries and bonuses, which are regularly
reported in the business press, the details of executive pension
plans are usually hidden away in the extra fine print of a
company’s SEC filings.
And CEOs love that pension-plan payouts come with none of
those annoying tied-to-performance strings attached. US Air’s
Wolf, for instance, made off with a $15 million pension cash
out just six months before the company filed for bankruptcy.
Richard Brown, former CEO of Electronic Data Systems, was
rewarded for overseeing a 62 percent drop in share price—and
steering the firm into an SEC investigation—with a pension
plan that will pay him $1.6 million a year for life. And Treasury
Secretary Snow’s $33 million pension prize came despite the
fact that his company’s stock underperformed its competitors’
by two-thirds over the last 11 years of his reign.
The picture is far bleaker for those down on the factory floor
or crammed inside an office cubicle, where ordinary workers
are seeing their pension plans slashed or eliminated altogether.
Less than half of those currently employed in the private
sector have any kind of pension coverage. And 40 percent of
those companies that do offer pension plans are exploring
the possibility of reducing benefits. Companies are also cutting
back on matching contributions to their employees’ 401(k)
accounts. Some, like Ford, Goodyear Tire, and Charles Schwab,
have decided to completely do away with matching contributions.
They probably need the extra cash for their executives.
There is also a major push underway, spearheaded by the Bush
administration, to allow companies to switch their existing
traditional, defined benefits pension plans to so-called cash
balance plans, which could lead to a serious loss in benefits
for older workers.
And even those workers who are able to hang on to their defined
benefits pensions can’t rest easy: It turns out that the vast
majority of corporate pension funds are critically underfunded.
In fact, of the 343 S&P 500 companies that offer traditional
pension plans, close to 90 percent of them are running a deficit.
And we’re not talking about being a few dollars short. General
Motor’s pension plan is $25.4 billion in the red while Ford’s
has a shortfall of $15.6 billion. All told, the S&P companies
are $206 billion in the hole; that’s a shift of $457 billion
since 1999 when the same pension funds had a collective surplus
of $251 billion.
In an effort to level the lopsided pension playing field,
Rep. Bernie Sanders (I-Vt.) and Rep. George Miller (D-Calif.),
along with 124 cosponsors, have introduced legislation that
would make it harder for companies to force older workers
to switch to cash-balance pension plans. To drive his point
home, Sanders showed how such a conversion would affect the
pensions of his fellow Congressmen. Denny Hastert, for instance,
would see his $540,000 lump sum benefit shrink to $164,000.
And Tom DeLay’s retirement payout would be cut by 60 percent,
shriveling from roughly $608,000 to $251,000.
members of Congress think that cash-balance payments are good
for American workers,” declared Sanders, “then they must believe
that cash-balance pensions are good for themselves.”
I couldn’t agree more. And the same goes for those pension-protecting
executives at American Airlines. If their future is worth
safeguarding, then so is their workers’ present. Just think
how many jobs the $41 million they put into that trust fund