Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Robert J. Jackson Jr.
Columbia Law School
Journal of Corporation Law, Vol. 30, No. 4, pp. 823-855, 2005
Harvard Law and Economics Discussion Paper No. 507
This paper presents evidence of the extent to which omitting the value of pension benefits has undermined the accuracy of existing estimates of executive pay, its variability, and its sensitivity to performance.We study the pension arrangements of CEOs of S&P 500 companies that (1) are now serving and are near the retirement age; or (2) left their positions during 2003 and the first half of 2004. Roughly two-thirds of these CEO have a pension plan (or similar retirement arrangement), and our findings with respect to these CEOs are as follows:
· The executives' pension plans had a median actuarial value of $15 million.
· The ratio of the executives' pension value to the executives' total compensation (including both equity and non-equity pay) during their service as CEO had a median value of 34%.
· Including pension values increased the median percentage of the executives' total compensation composed of salary-like payments during and after their service as CEO from 15% to 39%.
In addition, the pension benefits in our sample varied considerably with respect to both their magnitude and their relationship to the executives' overall compensation. Our findings indicate that the standard omission of pension plan values by researchers and the media leads to:
· Significant underestimation of the magnitude of executive compensation;
· Severe distortions in comparisons among executive pay packages; and
· Significant overestimation of the extent to which executive pay is linked to performance.
Our analysis demonstrates that the SEC new disclosure rules, which require companies to make executive pensions transparent in ways supported by this paper, can be expected to reveal large amounts of performance-insensitive compensation via executive pensions.
Number of Pages in PDF File: 33
Keywords: Executive compensation, executive retirement benefits, executive pensions, stealth compensation, camouflage, pay for performance
JEL Classification: J33, M41, M45, G38Accepted Paper Series
Date posted: March 30, 2005 ; Last revised: April 29, 2009
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