Another Ticking Time Bomb in Executive Compensation?

Investors' ire over abuses in executive compensation seems to have subsided now that most companies have met complex new disclosure demands from the SEC. But this week The Wall Street Journal turned the spotlight on an issue that exposes a dicey practice that businesses use to provide top executives supplemental pension benefits at what many believe to be the expense of average workers covered by company pension plans.

The blogosphere is abuzz with outrage over The Journal's exposé detailing the way companies have clandestinely lumped executives' supplemental pensions into their pension plans, enabling the company to reap tax benefits and allowing their executives the security of having their retirement benefits backed by the plans (supplemental executive pension plans are usually unsecured because there's no tax benefit in setting aside funds).

The problem is that doing this can jeopardize pension payments for employees. "It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy," the newspaper reports.

Benefits consultants orchestrate ways for companies to get around IRS nondiscrimination rules that prohibit favoring the highly compensated; and the report states that the IRS is so understaffed that it generally accepts companies' assurances that their plans pass nondiscrimination tests. It would take congressional action to change the rules and curb the practice.

Companies that are financing executive retirement benefits and pay through pension plans listed in the report include Intel, which argues that the practice helped shareholders through substantial tax savings and accounting benefits related to booking profits over a ten-year period. But the list also includes less financially sound businesses with underfunded pension plans whose employees were clearly injured by the strategy.

Employees never see the train coming because often consultants advise managements to keep silent about the practice to avoid an employee backlash, The Journal says. Some pension plan advocacy groups call this duplicitous. Others may put it a little more politely, asserting that such a lack of transparency qualifies as a governance "worst practice."