In November, the Government Accountability Office released a report titled “PRIVATE PENSIONS: Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 Million in Compensation Shortly Before Termination.” More or less the bottom line of the report: 10 companies with tens of billions of dollars in unfunded rank-and-file pension benefits paid hundreds of millions to a small group of executives in the five years before terminating their underfunded plans. The big loser—the Pension Benefit Guaranty Corporation (PBGC), which wound up paying billions; the “little” loser—employees who lost benefits that were both unfunded and not insured by the PBGC.
Obviously, out in the political atmosphere, these two things—PBGC liability and executive compensation—are connected somehow, but is there a logic to that connection?
Certainly, you’ve got to pay an executive something, and who is to say that in these circumstances this $350 million wasn’t the right amount? It’s clear that there are, anecdotally, instances that could only be called grotesque abuse. Also without doubt, there are companies out there (perhaps not these 10, which apparently all went bankrupt) with executives that are underpaid. In real life, if you want to win, you’re going to have to pay for talent.
Moreover, why exactly is executive compensation the PBGC’s problem? Couldn’t you make the same argument about corporate charitable giving? Every dollar of matching grants that these companies paid the United Way could have gone to fund the pension plan. Why pick on executives? Why not pick on the company day-care center?
Or, why not pick on regular employees? Surely there are some rank-and-file employees out there who are overpaid. According to The Wall Street Journal, the UAW jobs bank program cost U.S. automakers $1.5 billion in one year—2006. These were “employees” getting paid not to work.
The point being—if it’s not obvious—that there is no necessary link between executive pay and unfunded benefits. The idea that there is, is simply an appeal to envy—which is, you know, a base instinct. (Some of us actually think it’s a sin.)
Of course, there may be perfectly reasonable reasons for giving to the United Way, or providing a day-care center, or providing a jobs bank. There also may be perfectly reasonable reasons for paying executives managing companies through difficult times big salaries and bonuses. Or there may not. However, the government—is there any money being wasted on government employees I wonder?—is in no position to tell which is which.
Moreover, the report only looks at PBGC exposure pre-PPA (Pension Protection Act). At the time the PPA was adopted, the problem of pension underfunding and PBGC risk was generally understood. The solution Congress adopted, with the PPA, was to make all plans fund up benefits over seven years. We’re close to the end of the transition period—in eight or so years, all plans will, more or less, be fully funded, and the problem addressed in the report will, more or less, be gone.
In the report, two of the poster children for this supposed problem are airlines. Airlines got a special deal under the PPA, allowing them to not fund on the same timetable everyone else has to. So, what we have here is a lot of shouting about a bogus problem (big pay for executives + companies with underfunded plans) that is already fixed, using anecdotes about executives at companies that are getting a special deal from the same people that are doing the shouting.
The real screw-ee in all of this is not the PBGC; indeed, to the extent that the PBGC is screwed, it’s other corporate DB sponsors that will be paying the premiums to make up the PBGC’s deficit. The real victim of irrational executive compensation is shareholders (many of which, by the way, are pension plans).
Michael Barry is President of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has had 30 years’ experience in the benefits field, in law and consulting firms.