Lovely Parting Gifts
As Executives' Severance Packages Grow, So Does Criticism

a Washington Post Staff Writer
Wednesday, June 5, 2002; Page E01

Bernard J. Ebbers, chief executive of WorldCom Inc., was ousted from his job a month ago. But he got something better than a gold watch for his years of service: $1.5 million annually for life -- as long as he keeps up with the payments on his $400 million loans from the company.

L. Dennis Kozlowski, former chairman of Tyco International Ltd., had negotiated for himself a severance package worth more than $100 million -- though his resignation on Monday and indictment yesterday on charges of tax evasion have left the exact amount he will receive uncertain.

George Shaheen left his job as chief executive of Andersen Consulting in 2000 to become head of Webvan, a firm that disintegrated during the dot-com collapse. His18 months' labor there netted the 57-year-old executive $375,000 a year -- for the rest of his life.

After more than a decade of munificent salary-and-stock packages, many of America's corporate chieftains are departing with big retirement packages, provoking anger among some worker and shareholder activists.

"We're seeing the most obnoxious compensation packages in history" at a time when fewer workers have guaranteed retirement income, said John Hotz, deputy director of the Pension Rights Center, a nonprofit consumer organization.

Some company officials defend the arrangements.

Ebbers's pay package "was fairly standard for a CEO of this size company, with his tenure," said Brad Burns, a spokesman for WorldCom. "He founded the company, he was CEO for 19 years, he built it from scratch to a $32 billion company. We certainly think that's fair."

A telephone call to Tyco seeking comment was not returned.

Shaheen declined to comment on his retirement package.

But Hotz said the trend in executive compensation "certainly smacks of a gross injustice when there are huge cutbacks in the retirement system overall for workers."

In 1978, about 38 percent of workers were covered by defined benefits plans, which gave them a certain level of retirement income, and about 18 percent were covered by plans that required them to invest on their own for the future, according to the Employee Benefit Research Institute. By 1997, only 21 percent of workers had guaranteed retirement incomes and 42 percent participated in plans that required them to invest on their own, such as 401(k)s. The trend has become even more pronounced in the past five years, according to the EBRI.

At WorldCom, for example, workers who have been with the firm the longest have had traditional pension plans, while workers who have joined the firm in the past decade have been offered 401(k)s instead, so some have both.

To be sure, many workers, particularly in the recent boom market, have done well with 401(k)s, with the average worker aged in his or her sixties holding $177,000 in a work-based retirement investment account, said EBRI fellow Jack VanDerhei, a business professor at Temple University. But these accounts leave aging workers dependent on their own investing savvy and general market trends at the time of their retirement.

"The investment risk has been shifted from the employer to the employee," VanDerhei said.

That's not the case, however, for many of the top-earning execs, who are getting plush pension packages even if they performed poorly.

"It's the old pay-for-failure phenomenon," said Patrick McGurn, director of corporate programs at Institutional Shareholder Services. "They can go out and make any decisions they see fit, knowing they'll be bailed out down the line if they screw up."

Meanwhile some shareholders are saying enough is enough.

More than 50 percent of Bank of America shareholders voted in April to urge the board of directors to seek shareholder approval for future severance packages that exceed more than twice an executive's base pay and bonuses.

Early last month, about 56 percent of shareholders at Norfolk Southern Corp. voted that the board should seek shareholder approval for all executive severance packages. Norfolk Southern spokeswoman Susan Bland said the vote isn't binding on the board but that the shareholders' views "would be considered" in the future.

Other recently departed executives also walked out the door with hefty retirement packages.

Jack Welch, former chairman of General Electric Co., who stepped down from his job in September, received a pension of $9 million per year. A GE spokesman declined to comment on the retirement package.

Charles L. Watson stepped down last week as chairman at the troubled energy company Dynegy Corp. He'll get more money by going than he would have if he had stayed in his job for the remaining eight months on his contract. According to compensation consultants, his severance package will range between $18 million and $33 million, depending on how some clauses are interpreted.

Dynegy spokesman Don Nathan declined to comment on how much Watson will receive, or on whether the board believed the amount was appropriate. "The matter of compensation is an issue between Mr. Watson and the board of directors," Nathan said.

Carol Bowie, director of governance research at the Investor Responsibility Research Center, which tracks stocks for investors, said that today's executive retirement-pay packages reflect the lavish remuneration customary during the recent economic boom and stock market bubble, when executives were able to argue that a skills shortage made their talents more valuable than they had been in the past.

"Boards were under pressure to give whatever it takes to get executive talent," Bowie said. "They would offer anything."

Chief executives negotiated their salary and retirement packages with boards that often included directors handpicked by the CEO.

"The pay of CEOs is being set by 10 friends of management, which includes one token woman and one token minority," said Graef Crystal, a former compensation consultant who has become a vocal critic of what he views as excessive pay and perks for top executives. "The other six are CEOs themselves. They don't come with a philosophical distaste for high pay. To the contrary, they think it is wonderful."

Crystal said he believed the growth in CEO retirement income mirrors what has happened with executive pay. In 1973, Crystal said, the average CEO made 45 times more than the average worker at his firm. Now, the average CEO makes 450 times more than the average worker, he said.

Compensation consultant Alan Johnson, managing director of Johnson Associates, said executives were able to negotiate such pay packages because of a sort of market euphoria that most people eagerly accepted.

"You could say, 'My stock is up a billion dollars, I'm a super-being, and so I am clearly worth it,' " Johnson said. "We were all drinking the Kool-Aid."