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

It doesn’t include unvested employer contributions and unvested interest credited to deferred-compensation accounts. Nor does it include unexercised stock options (options aren’t subject to payroll tax until exercised) and unvested restricted stock (which isn’t subject to payroll tax until vested; the subsequent appreciation is taxed as a capital gain).¹¹

Also not included in the total compensation figures are types of executive pay that are never subject to payroll tax at all. This category includes incentive stock options (which are generally taxed as capital gains) and compensation characterized as a benefit (certain benefits, including pensions, aren’t subject to any Social Security taxes). The compensation data also leave out compensation paid to hedge fund and private equity managers. The billions they receive isn’t considered pay; it’s treated as “carried interest,” which is taxed as a capital gain.

And what about the other half of the compensation equation—benefits? In addition to $6.4 trillion in wages and salaries, private companies pay $1 trillion in benefits, which include contributions to retirement plans—both pensions and 401(k)s—health care, and life insurance contracts. It isn’t possible to tell what portion represents benefits—and liabilities—for executives.

At the giddy height of the mortgage bubble in 2006, economists at Goldman Sachs analyzed what had been the biggest contributors to record corporate profits. The lead items on their list weren’t productivity, innovation, or the quality of management. “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income,” they wrote. They weren’t talking about pensions and benefits, but the patterns are parallel.

SHADOW PLAN

Even if the public doesn’t know or care how big the executive liabilities are, finance officers certainly do, and they have come up with various ways to deal with it.

The life cycle of pension plans at drug wholesaler McKesson Corp. may provide a hint about how this trend will play out at the many companies with frozen pensions and growing executive liabilities.

McKesson froze its employees’ pensions in 1997, and the next year established a SERP for top management. The frozen pension plan soon had a surplus because workers were no longer building pensions and the liability was falling with every dollar paid out to retirees. Thanks to gains from curtailing the pension, plus asset returns, the frozen plan began to generate income. This offset the annual expense of the unfunded executive pensions.

Essentially, frozen employee pensions, like the one at McKesson, provide shadow funding for executive pensions. This isn’t necessarily a cash resource (see Chapter 8, “Unfair Shares”). Rather, the pension income offsets the drag the unfunded executive pensions create on income. This is one reason why companies freeze pension plans rather than terminate them: They can be worth more alive than dead. Why kill the fatted calf when you can continue to milk the cow for years?

In 2007, McKesson acquired Per-Se Technologies and merged that company’s underfunded frozen pension with McKesson’s overfunded frozen pension. This relieved McKesson of the need to contribute to the Per-Se plan. Indirectly, McKesson had monetized the surplus assets in its frozen pension plan. Over time, assuming McKesson doesn’t extract the assets, the plan will have a surplus that will continue to build, especially when interest rates begin to rise from their historically low levels. Once again, the frozen plan will be a shadow fund for the executive pensions, including the more than $90 million owed to chief executive John Hammergren.

CHAPTER 7

Death Benefits: HOW DEAD PEASANTS HELP FINANCE EXECUTIVE PAY

JUST BEFORE CHRISTMAS 2008, Irma Johnson, a widow in Houston with two young children, got a check in the mail for $1,579,399. It was the death benefit proceeds from the life insurance policy on her husband, Daniel, who’d died of a brain tumor at age forty-one the summer before. But the check wasn’t payable to the Johnson family. It was made out to Amegy Bank, the company that had fired her husband six years before he died.

The check was accompanied by a note from the U.S. Postal Service, saying that the original envelope had become damaged in processing. But there was no other explanation. Mystified, Johnson called the insurer that had issued the check, Security Life of Denver Insurance Co. The person she spoke to told her that Amegy Bank of Houston was the beneficiary of a life insurance policy on her husband’s life. The insurer had already sent the bank a check to replace the one lost in the mail.