Making Money

CEOs of large public companies are, in many cases, more skillful at making money for themselves rather than the company. This ability is demonstrated when they first take on the job, while they are performing it and when they leave it. And it is about leave-taking that I'd like to speak today.

While some CEOs have trouble with math, some of them have learned a great deal about present value (i.e., what a dollar I will receive in the future is worth today). They know that when interest rates are high, then the present value of a dollar is less than when interest rates are low.

Companies calculate the brass' pension based on an interest rate, how long the boss may live, the salary of the boss, how long he's worked there, etc. Many of these factors can be quickly established; two cannot - the interest rate to use and when the boss will die. Hence, the company has to use its best judgment on these two rather important factors.

CEOs have a built-in fear that the company cannot survive without them. If the company does fail, he and his pension are not protected by the government as you and I would be. The CEO becomes an unsecured creditor. Thus, believing that a bird in the hand is worth two in the bush, the CEO opts to take his pension in a lump sum when he leaves. And this is where his knowledge of present value, the company's judgment of his mortality and interest rates come into play.

If you're looking for a low interest rate in the world of pensions, what better source than the Pension Guaranty Benefit Corp. (PBGC)? It's a government agency that is charged with worrying about the pensions of we average Joes. Years ago they produced a formula to use to calculate a lump sum for a pension. The formula produces an interest rate that is almost always quite lower than the market rate. The PBGC uses it only on pensions whose lump sum is less than $5,000; further the agency itself says that the formula is outmoded. Yet, this is the formula used by some companies whose CEO decides to take a lump sum.

Let's use Hartford Financial Services as an example of what this means in dollars and cents. The company has recorded his pension benefits as $27,000,000 if he takes it over his remaining life. However, when they filed this pension information with the SEC under new regulations, the CEO will actually get $37,000,000 the day he leaves.

McKesson Corp. is a more egregious example of the stockholders getting screwed. Their CEO has a deal whereby he will be paid for more years than he will serve and for more money than he was actually paid (he'll be credited with 150% of his real bonus). Add in the interest rate assumption and you wind up with $84,600,000 should the 49-year-old retire tomorrow and get paid his pension as he walked out the door.

And, to really get my blood pressure up, today's mail brough news that my IRA lost 30% in the last few months.