Executive Compensation

American CEOs Earn Millions for Retirement

Carol Hymowitz and Margaret Collins, “CEO Pension Benefits: Bigger Than the Pay Advantage?” Bloomberg BusinessWeek, January 8, 2015 (Links to an external site.)Links to an external site..

In 2013 CEO compensation at the nation’s largest companies grew to 204 times higher than the salary of the average worker, a 20 percent increase since 2009. But the enormous wages paid to American executives is far from the only financial perk they receive. Along with inflated salaries, CEOs also enjoy lucrative retirement plans that can see them net tens of millions at the end of their careers.

For instance, Gregg Steinhafel recently stepped down as CEO of Target following a massive data breach in May 2014. Despite his managerial errors, however, Steinhafel left the company with a retirement plan valued at a whopping $47 million. He particularly benefited from a deferred compensation plan that guaranteed 12 percent annual interest on any paychecks he didn’t immediately deposit. By the time Steinhafel cashed out, he had put away nearly $10 million in deferred salary, which had accrued just as much value in interest. A further $27 million came from a combined pension plan for top executives along with an additional $11 million in severance and stock options for the 59-year-old.

Meanwhile, only Target employees who work more than 1,000 hours a year are eligible to save in its 401(K) plan. The retailer’s 31,000 staffers who participate in the program received an annual benefit of $4,000 in 2013. That’s a pittance compared to the plush pension programs extended to executives. Some executives are even offered supplemental executive retirement plans, or SERPs, that calculate pension payouts by multiplying the person’s total years of service with their average pay over the last five years. Many more offer deferred compensation plans like Target, although the retailer says it has since lowered its original 12 percent interest rate. All these options allow executives to avoid the caps that make it impossible for regular workers to collect as much money from their employer. In fact, many companies are outsourcing responsibility of their employees’ retirement plans to financial services firms, which we explore in depth in another abstract in this newsletter.

Questions:

1. Should executives be rewarded when they retire after errors on their watch? Explain

2. Should Boards of Directors be more vigilant before agreeing to executive contracts? Explain