GE Reworks Executive Compensation Structure

February 21, 2003 ( - Top-level compensation will no longer take into consideration income generated by the pension plan at General Electric Comapny.

The Communications Workers of America (CWA) initially proposed the measure that was recently adopted by the conglomerate in response to shareholder requests. Ed Fire, president of IUE-CWA, praised the GE move as “a step in the right direction,” according to a report by the Wall Street Journal.

GE said it intends to detail the new executive compensation system in its 2003 proxy. The change will have an impact on the long-term incentive compensation program for the three-year period starting this year. The management compensation committee will also be provided with net income figures minus the pension income when considering executive bonuses, which are awarded each February.

Before the Change

Prior to the new structure, GE had calculated compensation for its top executives’ based on a number of factors, including cash-flow growth and earnings per share. Until now, in determining its earnings per share, GE included pension income.

Pension income made an impact on the bottom line as GE’s pension plan generated more than $2 billion in income in 2001. The problem as the CWA saw it is pension income is not actual income on the pension investments.   This figure instead is generated by accounting rules that let companies count as income the amount by which estimated investment return on pension assets exceed a pension plan’s current costs.

Over the past decade, pension income had been growing substantially, thanks not only to healthy returns on pension assets, but also to cuts in pension benefits. Some shareholders have worried that linking executive pay and pension income creates an incentive for companies to cut pension benefits and withhold cost-of-living increases.

Other Companies Have Same Comp Practice

GE was far from alone in using pension income when determining executive compensation.   Despite recent declines in the stock market, pension income continues to contribute significantly to the bottom line of many companies, as most still have substantial pension assets and surpluses, and accounting rules enable companies to spread the impact of asset declines over a period of years.

GE, for example, reported $2 billion in pension income in 2001, even though the pension plan had a loss of $2.9 billion, and assets declined to $45 million from $50 million in 2000.A number of large companies, including IBM, now face similar shareholder proposals.