By JANET McFARLAND
Wednesday, May 7, 2003 - Page B2
With shareholders and reporters jumping all over
big executive compensation packages right now,
what's a company to do to ensure its CEO doesn't
actually have to take a pay cut while times are
bad?
Simple. The company cuts something high-profile,
like the chief executive officer's bonus, but makes
up the losses elsewhere by boosting less-watched
features of executive compensation. And the
obvious place to start is the executive pension
plan, because pension reporting is so complex that
often only experts can tell when a company has
changed the terms to enrich the CEO.
The options are many. The board can change
various features of the formula used to calculate
pension payments. Or it can adjust the
compensation base that determines an executive's
final pension payouts, by, say, including bonuses
and other payments on top of base salary.
Or the board can increase a CEO's years of
credited service, even if he actually hasn't worked
nearly that long, so that he qualifies for the bigger
pension.
BCE Inc., for example, gave new CEO Michael
Sabia nine years of credited service to the pension
plan when he took on the top job last year.
In return, he gave up stock options he would have
received last year, and accepted a reduction in the
range used to determine future option grants.
Or the board could just adopt a whole new pension
plan, if subtle adjustments don't cut it.
Shaw Communications Inc., for example,
adopted a new executive pension plan last Sept. 1,
at the end of its fiscal year. (This was a year in
which the company lost $288-million and paid no
bonus to CEO Jim Shaw. He also got no new
stock options.)
Under the old defined contribution pension plan,
the company contributed a maximum of $13,500 a
year per employee to a pension plan, and the
accumulated funds would be used on retirement to
purchase an annuity for the employee.
Under the new defined benefit plan, executives can
earn an annual maximum pension equal to 70 per
cent of their average pensionable earnings, which
is based on salaries and cash bonuses.
Executives with at least 10 years of eligible service
can retire with a full pension at 55.
Chairman JR Shaw, with 36 years of credited
service, has agreed to cap his pensionable
earnings at $2.76-million. Jim Shaw, who has 20
years of credited service, has $1.85-million of
pensionable earnings.
Canadian Imperial Bank of Commerce was
another company that had a bad year in 2002, and
CEO John Hunkin took no bonus as a result.
But last July 1, the company adopted a new
executive retirement plan. Among the new
features, the company changed the way the pension base is calculated,
reducing the hit caused by bad bonus years.
Under the old executive plan, the pension was based on an executive's
base salary and half of his or her bonus. It was based on the average of
the best consecutive five-year period within the past 10 years.
Under the new plan, the salary and bonus calculations are separated.
The pension is based on the executive's average best salary within five
consecutive years of the previous 10 years. And, separately, the
company also measures the average of the best five years of bonuses
in the past 10 years -- but they don't have to be consecutive years. The
final average is subject to specified limits.
That small but significant change means the bonus portion of the
pension can be based on the best bonus years, wherever they
happened to fall within the past 10 years.
Pensions are a fine place to tinker because so few investors notice the
details when they compare chief executive officers' compensation
packages. Some companies -- CI Fund Management, for example,
or technology companies like CryptoLogic -- don't even have a
pension plan for their executives, so their top people are, in reality,
paid
far less than their competitors with generous executive pensions. But
these companies likely get little credit from investors for their modesty
on this front, because pensions so often go unnoticed.
It's a safe bet that if stock markets remain weak, corporate directors
are going to be increasingly happy to adjust pension features rather
than boost other forms of compensation. And in some cases, they have
a particularly personal stake in the matter.
Some companies have started granting pensions to their directors,
even though they usually only work part-time, and most are successful
business people who often have their own generous pensions available
from their day jobs.
This practice opens yet another door for conflicts of interest. When
even directors can benefit from pension plan tinkering, there is no one
left to enforce some modesty on behalf of shareholders.