Pigging Out?

Special retirement plans for top executives are becoming a target for other stakeholders.

Think Social Security sets up intergenerational conflict? Try deferred compensation for top corporate managers. At financially strapped Delta Air Lines, in fact, a much-publicized dispute over the funding of special retirement plans for highly paid executives pits the company’s retired CFO against its current one.

The former CFO, 59-year-old Thomas Roeck, is 1 of 30 retired Delta executives who recently demanded in a letter to CEO Leo Mullin that the Atlanta-based company rescind a decision to spend roughly $45 million to fund separate retirement plans for 33 current executives. That decision comes at a time when the company’s troubles put the benefits of the retirees, not to mention those of the current rank-and-file, at risk. Much of that $45 million is going to Mullin, but others are also receiving sizable sums; for instance, $790,529 is designed to fund the future benefits of Delta’s current CFO, Michele Burns. And those amounts represent only 60 percent of the total earmarked for the executives’ special pensions by 2004.

Meanwhile, the special plan that Roeck and his fellow retirees received while employed by Delta is unfunded, while the company’s conventional pension plan is underfunded by some $5 billion, or almost 42 percent.

In a letter rejecting the retirees’ demand, Delta’s general counsel responded that the current management team has stuck with the company since 9/11 despite its problems, has outperformed managers of other airlines, and “is determined to avoid…all of the pain to all Delta people, both emotional and economic, that would flow from a bankruptcy”.

Roeck, for one, isn’t contemplating further action to convince the company to change its mind. The letter to management, he says, represents “my best shot.” But the lawyer representing the retirees won’t rule out litigation. “Thousands of people have a [complaint],” observes Dean Booth of Atlanta-based Schreeder, Wheeler and Flint LLP, “and others [besides Roeck] have the wherewithal to scratch an itch.”

The protest over Delta’s funding of its benefits for top management reflects a growing public backlash against such arrangements, which are perceived to be unfair at a time when lower-paid employees are seeing their own benefits cut. At AMR Corp. (the parent of American Airlines), for example, former chief executive Donald Carty was forced out after the company’s 10-K for 2002 revealed that the airline had funded its supplemental retirement plan for senior executives just a few months before Carty asked unionized employees to give back some of their own retirement benefits.

Of course, the airline industry is in particularly dire straits. But unless the economy improves dramatically, the backlash is likely to affect other companies making use of such plans. Not only are shareholder activists starting to focus on this issue, but abuses by some companies — particularly those in or nearing Chapter 11 — have led Congress to consider action to curb the arrangements.

SERPs Up

Supplemental retirement and compensation plans are certainly widespread at this point. A recent survey of roughly 200 Fortune 1,000 companies by Clark Consulting, a compensation firm in Dallas, found that more than three-fourths had such executive plans in place last year (see “Beyond Reach?” at the end of this article). And while it’s unclear how many companies fund these plans, anecdotal evidence suggests a growing number are doing so as tough times threaten unsecured benefits. In addition to Delta and AMR, companies that have recently funded such nonqualified plans include Abbott Laboratories, Altria Group (formerly Philip Morris), Motorola, Owens-Illinois, and TXU. Motorola, for its part, contributed $38 million to its supplemental plan last year while adding nothing to its qualified plan for 70,000 employees, even though the qualified plan was underfunded by $1.4 billion, or roughly a third. (The company intends to add up to $200 million to that plan this year.)

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