MSN Money - While pensions fall short, CEOs fly high

Company Focus Posted 6/22/2005

While pensions fall short, CEOs fly high

Ford, GM, United Airline, Continental. They're just four of the companies struggling with falling profits and pension problems as their executives get huge payouts.

By Michael Brush CNBC

At companies across the country, workers are watching their pensions dwindle.

At UAL’s (UALAQ, news, msgs) United Airlines, workers stand to lose more than $3 billion in promised benefits as the airline passes its pension obligations on to the government.

Unfunded pension obligations at Ford (F, news, msgs) have risen to a whopping $12.3 billion, and General Motors (GM, news, msgs) is looking at shortfalls of $7.5 billion.

In the executive suites of these companies, however, there's no pain to be found. United Airlines chief executives John Creighton, Jr. and Glenn Tilton collected $13.1 million in the two years leading up to its 2002 bankruptcy.

And while the pension pit grows at Ford, chief executive William Clay Ford Jr. has collected $53 million over the past three years. At GM, G. Richard Wagoner Jr. got $40.7 million over that period.

It's no secret that corporate bigwigs have paid themselves handsomely while stiffing their workers and sending jobs overseas. It's particularly galling, though, to see these same executives locking in their own lifetime of luxury while rolling the dice with their workers' retirement years.

Separate and unequal pensions

Consider the case of Continental Airlines (CAL, news, msgs). Last year, with Continental and other major airlines facing massive losses and the threat of bankruptcy, outgoing Continental chief Gordon Bethune took a $22 million lump-sum payment from his retirement plan. At the same time, Continental's pension plan is underfunded by $1.58 billion.

“That situation with Bethune just crystallizes the whole unfairness of it all,” says Paul Hodgson, a senior research associate with The Corporate Library, a Portland, Me. company that examines executive pay and corporate governance issues for investors. “The amount that (executives) have earned over the years would seem to be enough to provide for their retirement, and the idea that you have to provide retirement benefits worth 50% of their annual compensation is absurd.”

Pensions don't actually shrink unless a company files for bankruptcy and passes pension obligations on to the government. Pfizer (PFE, news, msgs) has a $2.98 billion pension plan shortfall, but $19.8 billion in cash. But seemingly healthy companies can be felled by unexpected events, as United discovered after Sept. 11, 2001. GM has $35.9 billion in cash on its books (much of it tied up in its financial arm), but earlier this spring analysts speculated openly about the likelihood of the automaker filing for bankruptcy protection.

With help from Standard & Poor’s, we took a look at the 20 companies currently running the most underfunded pension funds. We found that the top brass at some of those firms have rewarded themselves with retirement plans that promise millions of dollars in annual income for the rest of their lives.

Here’s a look at some of the most glaring examples from a Standard & Poor’s ranking of the 20 S&P 1500 companies whose pension plans are most deeply in the red. (See the results in the table below).

Pensions poor, CEOs rich

Company Name	Pension underfunding (billions)	CEO pay, past three years* (millions)	Total executive pay** (millions)	Total as a percentage of underfunding
Ford (F, news, msgs)	$12.31	$53.2	$105.5	0.9%
Exxon Mobil (XOM, news, msgs)	11.5	91.9	196.2	1.7%
General Motors (GM, news, msgs)	7.53	40.7	104	1.4%
IBM (IBM, news, msgs)	7.38	55.9	112.6	1.5%
Delta Air Lines (DAL, news, msgs)	5.3	23.4	58	1.1%
Lockheed Martin (LMT, news, msgs)	4.88	54.4	140.7	2.9%
Delphi (DPH, news, msgs)	3.98	23.9	58.6	1.5%
Boeing (BA, news, msgs)	3.80	8	33.9	0.9%
Raytheon (RTN, news, msgs)	3.64	21.3	45.8	1.3%
DuPont (DD, news, msgs)	3.51	21.3	50.8	1.4%
United Technologies (UTX, news, msgs)	3.14	37.9	73.3	2.3%
Goodyear (GT, news, msgs)	3.12	9.6	22	0.7%
Pfizer (PFE, news, msgs)	2.98	62.7	137.6	4.6%
Dow Chemical (DOW, news, msgs)	2.8	27	60.1	2.1%
Excelon (EXC, news, msgs)	2.76	27.2	81.9	3%
Procter & Gamble (PG, news, msgs)	2.35	61.3	132.7	5.6%
ConocoPhillips (COP, news, msgs)	2.18	79.8	203	9.3%
Hewlett-Packard (HPQ, news, msgs)	2.09	31.2	98.2	4.7%
Altria (MO, news, msgs)	2.05	50	121.9	5.9%
Alcoa (AA, news, msgs)	1.95	45.9	72.9	3.7%

*Includes salary, bonus, restricted stock grants, "other" compensation and S&P estimate of the value of options at the time they were granted, using the Black Scholes model.
**Top five executives
Source: Standard & Poor's

Ford: Profits fall, CEO pay stays high

Ford takes top honors. Its $12.3 billion pension shortfall could someday force rank-and-file Ford employees to accept pension checks that are a fraction of what they've been promised.

But that didn’t stop Ford chief executive Bill Ford from collecting a cool $19.9 million last year, according to Standard & Poor’s. Collectively, the five top managers at Ford pulled down $105 million over the last three years while the automaker’s performance languished, making it harder for the company to fund pension promises to workers.

Like United Airlines, Delta Air Lines (DAL, news, msgs) may wind up in bankruptcy. If so, that could mean the federal government will have to pick up the tab for Delta’s pension obligations just like at United Airlines -- all but assuring retirement benefits will be dramatically cut.

Delta has the fifth-largest pension shortfall, at $5.3 billion. But former chief executive Leo Mullin collected $23.5 million in the three years before his departure as head of Delta two years ago.

Pensions suffer, in good times and bad

It's not just companies in troubled sectors like airlines and automakers that have big pension shortfalls and fat executive compensation. Energy companies are recording huge profits and rewarding their chiefs while neglecting their future pensioners.

Exxon Mobil (XOM, news, msgs), for example, has the second biggest pension-fund shortfall (Ford is first.) Exxon has an $11.5 billion hole in its worker retirement plan. Yet the six top execs at the company took home $196 million over the past three years. Exxon Chairman and Chief Executive Lee Raymond pocketed $38.1 million last year.

All told, the top managers at the 20 companies with the biggest pension shortfalls earned $1.9 billion in the past three years, according to Standard & Poor’s.

At the same time, the deficits in their pension plans for the rank and file mounted to massive $89 billion. That disconnect between burgeoning pension deficits and rising executive pay has some retirement plan experts scratching their heads.

They can (and do) take it with them

The excesses don’t stop with the sweet pay packages. Indeed, while rank-and-file workers wonder if the red ink in their retirement plans may mean they’ll spend their final years in the poor house, their well-heeled execs are taking steps to assure they won’t.

Pfizer's $2.98 billion pension shortfall didn’t stop chairman and chief executive Henry McKinnell from signing a juicy retirement plan that will give him $6.5 million in annual retirement income, according to the Corporate Library. It's not like McKinnell will enter retirement short on cash. Pfizer has paid him $62.7 million over the past three years, according to Standard & Poor’s.

IBM (IBM, news, msgs) has a $7.38 billion hole in its retirement plan. Yet IBM chairman and chief executive Samuel Palmisano has a $4.1 million annual pension, calculates the Corporate Library.

To be fair, these special executive pension plans -- often called supplemental executive retirement plans, or SERP's -- don’t have the same level of protection in bankruptcy enjoyed by retirement plans for regular worker, says David Wasserstrum, director of the compensation and benefits group for BDO Seidman, an accounting firm.

Even the safety net is in trouble

Executives are taking rich pay and retirement packages at a time when the pension plans for rank-and-file workers are deep in the red. Our nation’s private sector retirement plans are underfunded by $600 billion, according to Douglas Holtz-Eakin, director of the Congressional Budget Office.

To make matters worse, the agency set up to take over bankrupt pension plans from the private sector -- the Pension Benefit Guaranty Corporation (PBGC) -- is itself broke, facing a $23.3 billion deficit.

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.

Fund data provided by Morningstar, Inc. © 2005. All rights reserved.

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