AUSWR
The Association of U S West Retirees
 

 

 

Deferring Compensation Also Creates A Company Debt to Executives
By Theo Francis and Ellen E. Schultz
The Wall Street Journal
Friday, June 23, 2006

Besides pensions, most large companies owe their executives another retirement debt:  deferred compensation.  While that might seem unlike an executive pension, it's similar in critical ways.

Deferred-compensation plans let executives put off receiving large chunks of their salary and bonus until retirement.  The plans have often let executives defer other pay as well, such as gains from exercising stock options.  The deferred sums grow tax-free.  Sometimes they increase at an above-market interest rate guaranteed by the company.  Some companies also add to the balances with contributions from time to time.

"Deferred-comp" plans are similar to pensions in that they represent money a company must pay in the future for work done today.  As a result, the plans are liabilities for the companies -- that is, debts.  The carrying cost of this debt is something that companies must deduct from their earnings each quarter.

Deferred-comp plans resemble executive pensions, in particular, because they often aren't "funded."  That is, companies usually don't lock away assets in the plans to pay the money when due.  So deferred-comp plans affect company profits in much the same way as executive pensions do: by reducing them.

Although deferred-comp plans are sometimes likened to 401(k) accounts, there is a key difference:  401(k) plans don't create a corporate debt or liability.  That's because employees fund them with money from their pay, and companies that choose to match part of the contributions are free to stop any time.

Deferred-comp plans, however, create huge (and typically unfunded) corporate liabilities.  General Electric Co.'s liability for deferred compensation is $2.4 billion.  Its total unfunded liabilities for executives -- deferred comp plus pensions -- equals more than 15% as much as its total retirement liability for more than 500,000 workers and retirees.  GE said the executive-retirement liabilities aren't significant for a company as big as GE, whose stock-market value is about $350 billion.

At some companies, executive-retirement liabilities are almost as big as the IOU for pensions of regular workers, who are far more numerous.  Countrywide Financial Corp.'s executive-retirement liability -- pensions plus deferred comp -- at the end of last year stood at $340 million.  That was not far from its $373 million obligation for 25,915 ordinary workers and retirees.  Countrywide said $35 million of the executive liability was for pensions, the rest for deferred comp.

At one company, Comcast Corp., an executive-retirement liability of $469 million exceeds the pension obligation for other employees, which is $194 million.

The two were almost equal in 2003.  But then Comcast froze two pension plans for certain salaried workers.  The freeze cut its debt to these employees.

Comcast's deferred-comp liability lowered its earnings by $40 million last year, which was five times as much as the drag on earnings from the frozen pension plans for salaried workers.

Comcast said the frozen plans aren't a core part of its retirement benefits because they arrived via an acquisition.  "A 401(k) is our primary retirement savings vehicle for our employees, not a pension," the company said.

Write to Theo Francis at theo.francis@wsj.com and Ellen E. Schultz at ellen.schultz@wsj.com

http://online.wsj.com/article/SB115103370166088532.html?mod=Leader-US