According to published reports, the Securities and Exchange Commission has launched an informal probe into the retirement perks doled out to former General Electric Co. chief executive Jack Welch.
Last week, the New York Times reported that Welch received a host of retirement benefits that were never disclosed, including use of a Manhattan apartment owned by GE, floor-level seats to the New York Knicks, courtside seats at the U.S. Open tennis tournament, and satellite television at his four homes.
Reportedly, Welch last week asked GE to take back many of the perks. On Thursday, GE’s board of directors agreed to let Welch keep the benefits—as long as he paid for them, according to reports.
Yesterday, however, GE management announced it had decided to cancel many of Welch’s perks. GE spokesman Gary Sheffer also acknowledged that the conglomerate had received notice of the SEC inquiry and said the company is cooperating with the commission.
Welch said that he will pay for many of the perks and services, which he valued at as much as $2.5 million a year, according to published reports.
That sum could be low, however—if you go by the math in an article in today’s edition of the Times. In it, the paper notes that the government tends to assess perks by the cost to shareholders—not necessarily the cost to the perk-receiver. For example, it might cost an executive less than $500 to take a corporate jet from New York to Paris on vacation. But the flight would actually cost shareholders at least $15,000.
Of course, SEC disclosure rules do not apply to retired chief executives like Welch.
For his part, Welch went on the offensive yesterday. Writing in the Wall Street Journal, the former GE CEO said the perks had been “grossly misrepresented” in the divorce case with his ex-wife, who brought these benefits to light in her legal filings.
“For the record, I’ve always paid for my personal meals, don’t have a cook, have no personal tickets to cultural and sporting events and rarely use GE or NBC seats for such events,” wrote Welch. “In fact, my favorite team, the Red Sox, has played 162 home games over the past two years, and I’ve attended just one.”
Welch also wrote: “In today’s reality, my 1996 employment contract could be mis-portrayed as an excessive retirement package, rather than what it is—part of a fair employment and post-employment contract made six years ago. For GE and its board to be dragged into these stories because of a divorce dispute is just plain wrong.”
But, acknowledging the recent rash of corporate executive abuses, Welch said he grudgingly agreed to relinquish the perks because “perception matters.”
“In this environment, I don’t want a great company with the highest integrity dragged into a public fight because of my divorce proceedings,” he wrote. “I care too much for GE and its people.”
Appearing on CNN’s “Moneyline” late last night, Welch noted that executive compensation is a complicated topic—and that limiting what companies pay top managers could have unintended consequences. He also seemed to indicate that a generous retirement package can help a company hold on to a prized senior executive, particularly if that top executive is being courted by rival corporations.
Manic Monday, Tyco Tuesday
Management at Tyco International Ltd. said it plans to file an 8-K report with the SEC that will include new details about previously undisclosed loans made to dozens of employees. Reportedly, those loans were later forgiven—apparently on the instructions of former chief executive L. Dennis Kozlowski.
The loans, worth millions of dollars, were supposed to be revealed in a filing as early as Monday, the New York Times had reported. But the company indicated it delayed the filing due to the Yom Kippur holiday.
The filing is also expected to describe details of many of Kozlowski’s activities that led to his indictment last week on charges of fraud, larceny, and corruption, as well as of the company’s own lawsuit against him and two other senior executives.
Conference Board to Endorse Expensing Options
A special task force of The Conference Board is expected to come out today in favor of expensing executive stock options. This, according to a story on the Washington Post’s Web site.
The article states that 2 high-profile members of the 12-person task force plan to officially disagree with the group’s recommendation, however.
Apparently Intel Corp. chairman Andrew S. Grove thinks stock options are too hard to value and shouldn’t be added to expenses. And former Federal Reserve Board chairman Paul Volcker believes that treating options as an expense doesn’t go far enough. The former Fed chairman would like to see options phased out as a key component of executive pay altogether, according to the paper.
The options-related recommendation—and dissenting opinions—will actually be part of a larger report that will offer 20 recommendations for bringing executive pay in line with shareholder interests, said the Post‘s report.
The task force is expected to recommend that companies base executive pay on a company’s long-term performance rather than short-term stock price, and that board of directors’ compensation committees be more independent of top executives.
Although The Conference Board’s recommendations regarding options aren’t binding, they are deemed to be the strongest options-related standards adopted so far by a business group.
“The Conference Board’s recommendations are taken seriously by people interested in business policy,” Jamie Heard, chief executive of Institutional Shareholders Services Inc., told the Post. “Companies have figured out that this is what their investors want to restore trust and confidence.”
The International Accounting Standards Board has already come out in favor of expensing options. The Financial Accounting Standards Board is currently considering a similar proposal.
Retirees to Pay More for Health-Care Coverage
Future retirees will probably pay much more of their health-care benefits—if not all—according to a new study by Watson Wyatt Worldwide.
Under plan provisions already adopted by many businesses, employers will pick up less than 10 percent of total retiree medical expenses by the year 2031, according to the study. Today, large employers typically pay more than 50 percent of total retiree medical expenses, the consulting firm estimates.
“The net result of skyrocketing medical costs and public policy has been to render retiree health benefits economically irrational,” says Sylvester J. Schieber, vice president and director of research at Watson Wyatt and one of the study’s co-authors. “The burden on future retirees to pay their own medical costs is increasing dramatically, and far too few employees are prepared for these looming changes.”
In fact, 22 percent of the employers studied have already eliminated retiree medical plans for new hires altogether. Another 17 percent will require new hires to pay the full premium for coverage.
Other employers are capping their contributions, linking contributions to the retiree’s length of service, or imposing stricter minimum-service requirements for future retirees.
According to the study, there are a number of reasons why retirees are seeing their health benefits shrink. The list includes escalating health-care costs, growing retiree populations, uncertain business profitability, and federal regulations that discourage employers from prefunding retiree medical benefits.
The study is based on an analysis of data from nationally representative surveys of the population and employers, augmented by an examination of actual plan characteristics from a sample of 56 large employers with at least 5,000 employees.
According to Watson Wyatt, employers have seized upon a variety of tactics to cut the health benefits of future retirees. Those methods include:
- Imposing strict minimum-service requirements for workers to receive benefits. For example, back in 1984, 90 percent of large employers that offered retiree medical benefits to workers over age 65 required five or fewer years of service. Last year, only about one-quarter offered benefits to workers retiring with five or fewer years of service. For future retirees, only 14 percent allow workers to qualify for benefits so quickly.
- Tying the employer’s portion of the premium to the workers’ length of service at retirement. For current post—age 65 retirees, 32 percent had adopted service-related contributions, but 72 percent of employers do so for future retirees.
- Reducing average employer premium contributions from 80 percent for current retirees to 60 percent for future retirees.
- Capping the amount companies will pay toward annual retiree medical premiums. Currently 45 percent of employers cap contributions for new hires, while 39 percent do so for current employees. Only 25 percent cap contributions for current retirees.
Two New Tech CFOs
Two well-known technology companies named new chief financial officers on Monday.
Gateway Inc. said Roderick Sherwood III will become CFO beginning October 1. Sherwood most recently served as CFO of automation software firm Loudcloud (now Opsware Inc.).
Sherwood has held senior positions at Chrysler Corp. and Hughes Electronic Corp. He replaces Joseph Burke, who is becoming Gateway’s senior vice president of business development.
And the trapdoor in the CFO’s office at BroadVision Corp. appears to have slid open once again.
The software maker reported that Philip Oreste will replace Fran Barton as CFO. Oreste is the third top finance executive at BroadVision in 15 months.
Barton resigned to pursue other interests and will assist the company in a consulting role during the transition, a company spokesman told Reuters.
Oreste has more than 13 years of experience in finance and management, and has held executive positions at Intershop Inc. and Pacific Bell Internet.
(CFO PeerMetrix: Examine cost management at these companies, and see how your company measures up.)
In other CFO news, construction-equipment maker Terex Corp. named Phillip Widman chief financial officer. He replaces Joseph Apuzzo, who was named president of Terex Financial Services.