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October 24, 2006 5:50 PM Age: 8 yrs

Executive Compensation vs. Workers; An Overview of Wages, Pensions and Health Benefits of Rank-and-File Workers and Sky High Executive Pay;

Category: CG Research & Insights, Exec Comp News
Source:  Prepared by Democratic Staff of the Financial Services Committee

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 In the Bush economy it pays to be a CEO—but life is not as easy for the rest of America’s workers.  Wages for the vast majority of American workers are stagnant, while CEOs and other top executives take home larger and larger payouts.  Pension plans for the rank and file are frozen and terminated, while CEOs grab giant multi-million dollar pensions and retirement packages.  Health benefits and retiree health benefits for most workers are being slashed, while top executives rake in health perks as compliments to their already oversized compensation packages. 

 Large portions of the benefits that top executives receive are hidden—as they have not been required to be disclosed, and shareholders are powerless to limit them.  A bill introduced by Congressman Barney Frank, Ranking Member of the House Financial Services Committee, and supported by a large number of Democrats would require reasonable disclosure of and permit shareholder participation in the review and approval of executive pay structures.

 Wages for Regular Workers are Stagnant—Earnings for Top Executives Increase

CEOs have seen increases in their earnings at a rate far greater than that of the average worker.  In 1965, U.S. CEOs at major companies made 24 times a worker’s pay—by 2004, CEOs earned 431 times the pay of an average worker.[1]  From 1995 to 2005, average CEO pay increased five times faster than that of average workers.[2]  While CEO pay continues to increase at rates far exceeding inflation, wages for the vast majority of American workers have failed to keep up with rising prices.  In fact, real wages for the 90% of Americans who earn under $92,000 a year have actually fallen since 2001.[3]

 When comparing CEOs to minimum-wage earners, the contrast is even starker.  In 2005, median pay for CEOs of the 100 largest companies rose 25% from the previous year.[4]  Minimum-wage earners this year, on the other hand, made the same amount as last year, and every year before that since the 1996-1997 increase—adjusting for inflation they actually made less than then (in inflation-adjusted dollars, $5.15 today is the equivalent of only $3.95 in 1995). [5] CEOs, on average, take home 821 times as much as a person working for minimum wage.[6]  With this extraordinary ratio, an average CEO makes more before lunch on his first day of work than a minimum-wage earner will make all year. 

 Pensions for Regular Workers Decrease—Pensions for Top Executives Increase

 Pensions for the rank-and-file employees are increasingly frozen or done away with, while retirement perks for CEOs and other top executives continue to increase.  CEOs and other top executives are often awarded multi-million dollar pensions, options and bonuses when they leave a company, while the average worker at these companies faces a less certain retirement due to a pension that was frozen or not having a pension at all. 

 By 2004, 71 of the Fortune 1,000 companies had at least one frozen or terminated pension plan—this number increased to 113 in 2005.[7]  The number of companies that have closed a pension plan to new hires or announced an intention to do so doubled in just the past year.[8]  But as companies move to freeze or terminate pension plans for regular employees, CEOs of many companies continue to rake in record pension plans:[9]

Lee Raymond of Exxon Mobil has an annual pension of $8.2 million.

Henry McKinnell of Pfizer has an annual pension of $6.5 million.

Edward Whitacre of AT&T has an annual pension of $5.5 million.

 Exxon Mobil, with the nation’s largest pension for a CEO, also has a record underfunded pension plan for its regular employees—to the tune of $1.2 billion.[10]  At BellSouth, pension obligations for ordinary employees have shrunk 3% since 2000, while executive pension obligations are up 89% over the same period.[11]  Executive pensions are accounted for separately and are increasingly consuming larger portions of the overall pension obligation of companies:[12]

At Aflac, executive pension obligations account for 58% of total pension liability.

At Exxon Mobil, executive obligations account for 12% of total liability.

At Federated Dept. Stores, executive obligations account for 19% of total liability.

At Pfizer, executive obligations account for 12% of total liability.

 The sheer amount of money that companies are liable to pay out on these excessive retirement packages creates a drain on the profitability of companies.  At seven companies, executive pension obligations are now over a billion dollars: General Electric ($3.5 billion), AT&T ($1.8 billion), GM ($1.4 billion), Exxon Mobil ($1.3 billion), IBM ($1.3 billion), Bank of America ($1.1 billion) and Pfizer ($1.1 billion).[13]

 Health Benefits for Regular Workers Decrease—Health Benefits for Top Executives Increase

Health benefits for most workers and retirees have been slashed, while at the same time CEOs and other top executives rack up bigger compensation packages with health benefits. Average workers are forced to deal with the economic reality of rising health costs and the uncertainty of whether they will receive the health benefits for which they have worked, while top executives have found new ways to increase their compensation with health care perks.  Health benefits to retired CEOs are above and beyond the lush multi-million dollar pensions that many of them already will receive.  Like many perks of the already well-compensated executives, these benefits are often hidden from the public—because it isn’t required by current disclosure rules.

 A recent study of the nation’s largest private-sector employers found that the number offering retiree health coverage has decreased from 66 percent in 1988 to only 33 percent in 2005.[14]  But, for CEOs and other top executives at many companies, compensation and health benefit perks continue to grow:

In October 2005, General Motors announced that it would slash health-care coverage for its unionized retirees. [15]  GM’s CEO Richard Wagoner raked in compensation totaling $5.5 million in 2005.[16]

Regular retirees of Northrop Grumman Corp. can expect annual increases in their health care premiums for inflation—but for a group of select top executives the company will absorb any cost increases.[17]

At Northwest Airlines, rank-and-file employees have to work 23 years before they can qualify for retiree health coverage at the age of 55—which ends in ten years when the employees become eligible for Medicare.  This is in comparison to the three years it takes for top executives to qualify for lifetime health coverage that also covers their dependents and includes all out-of-pocket dental and medical costs. [18]

AT&T pays up to $100,000 per family per year for its already highest paid executives to cover any out-of-pocket health-care costs they might incur.  This includes CEO Edward Whitacre who made $17.1 million last year.[19]

When Gordon Bethune retired as chairman of Continental Airlines, the company offered free health care for him and his dependents—this is on top of a lifetime of free flights, a decade of free office space and a lump-sum pension of $22 million.[20]

 

--------------------------------------------------------------------------------

[1] AFL-CIO Executive Paywatch website: www.paywatch.org

[2] “Delinquency of the CEOs,” The Washington Post, July 13, 2006

[3] Piketty and Saez (2006), using IRS data

[4] “Median Pay for CEOs of 100 Largest Companies Rose 25%,” USA Today, April 10, 2006

[5] Economic Policy Institute website: www.epi.org

[6] “CEO Earnings: 821 Times Minimum-Wage Workers,” Reuters, June 30, 2006

[7] “More Firms Dropping Pensions,” The Seattle Times, June 28, 2006

[8] Id.

[9] AFL-CIO Executive Paywatch website: www.paywatch.org

[10] “Shortfall at Exxon,” BusinessWeek, May 29, 2006

[11] “As Worker’s Pensions Wither, Those for Executives Flourish,” The Wall Street Journal, June 23, 2006

[12] Id.

[13] Id.

[14] “Retiree Health Care is Contentious Issue,” Deseret Morning News, July 23, 2006

[15] “Wielding the Ax,” The Wall Street Journal, October 18, 2005

[16] AFL-CIO Executive Paywatch website: www.paywatch.org

[17] “The CEO Health Plan,” The Wall Street Journal, April 13, 2006

[18] Id.

[19] Id.

[20] Id.

 

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