John Copeland

Opinion: Sarbanes-Oxley doesn't slow CEO perks

John Copeland

Posted online January 15, 2006 | 11:00 pm

Congress passed the Sarbanes-Oxley Act of 2002 to make corporate executives and directors more fiscally responsible and to make corporate financial dealings more transparent. SOX also encourages director independence from CEOs. Although SOX reforms are largely effective, excessive CEO compensation remains a problem.

According to the Corporate Library in Portland, Maine, in 2004, total compensation for the CEOs of more than 1,500 large corporations rose a median of 30 percent over 2003, which is double the 15 percent increase of 2003 over 2002. The average CEO of a major company received $9.8 million in compensation from salaries, bonuses, restricted stock grants, gains from stock options, long-term incentive plan payouts, pension benefits and other benefits.

With the end of 2005, investors get a look at CEO compensation deals. It is only a peek, however. Proxy statements and 10-k filings fail to reveal or explain all compensation. If benefits are less than $50,000 in value, or represent less than 10 percent of an executive's total salary, plus bonuses, the benefits are not revealed as “other” compensation. What does become known is sometimes shocking.

Pension plans

Pension plans are a popular means for giving CEOs questionable compensation.

Financially troubled Delta Airlines credited its CEO, Leo Mullin, with an extra 22 years of service after only five years and eight months of employment. Mullin, who is in his early 60s, is eligible for an annual pension payment of $1 million starting at age 65. A special Delta trust fund protects Mullin's pension from creditors.

EDS's former CEO Dick Brown received credit for 20 years of service after only four years as the company's CEO. Brown is eligible for a pension of $19.6 million.

U.S. Airways added 24 years to CEO Stephen Wolf's service record after only six years as CEO and made Wolf's pension worth $15 million. When current U.S. Secretary of the Treasury John Snow resigned as CSX's CEO to join the Bush administration, he cashed in a pension plan worth $33 million. CSX's board made the large pension possible by giving Snow credit for an extra 19 years of service.

Some retired CEOs also benefit from profitable special executive employment contracts or consulting deals with their old companies. Verizon Communications hired former co-CEO and Chairperson Charles Lee as a consultant. Verizon pays Lee a monthly consulting fee of $250,000. Documents attached to 10-k filings reveal similar deals for other former CEOs.

Besides receiving a hefty monthly paycheck, retired CEOs use company airplanes, cars, luxury retreats and seats at sporting events. Some companies reimburse former CEOs for estate- and tax-planning expenses, and even country club dues. Occasionally, the retired CEO's family members and friends receive similar benefits.

Gross-ups

Hotel owner Leona Helmsley is famous for allegedly saying “Only little people pay taxes.” Helmsley later had her own problems with the Internal Revenue Service. But some CEOs are seemingly so “big” that their corporations ease their tax burdens.

Using “gross-ups,” companies assure CEOs of pocketing a certain income. The corporation grosses-up the CEO's income and in effect pays part of a CEO's taxes. Some former CEOs receive the same treatment under consulting deals or special executive employment contracts.

Failure rewarded

Even ineffective or failed CEOs receive questionable compensation. In 2002, Sprint's top two executives received stock options worth up to $311 million for planning a merger that failed.

AT&T paid a $2.5 million “transaction bonus” to former CEO Michael Armstrong for selling the company's cable networks to Comcast CMCSA. AT&T paid the bonus although the sale resulted from Armstrong's inability as CEO to make AT&T successful in cable networks.

Who is to blame for questionable CEO compensation? Powerful and greedy CEOs get much of the blame. Corporate directors, however, are mostly at fault. Some directors act as if CEOs are entitled to excessive salaries, unearned annual raises, unjustified bonuses and unconscionable perks simply because they are CEOs.

Self-serving board members abandon their fiduciary responsibilities to shareholders and approve excessive compensation to gain favor with CEOs and protect their own well-paid corporate positions.

John D. Copeland, J.D., LL.M., Ed.D., is an executive in residence at the Donald G. Soderquist Center for Business Leadership and Ethics and professor of business at John Brown University in Arkansas.

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