L. Dennis Kozlowski gave up more than $4 million a year in retirement benefits when he resigned as CEO of Tyco International Ltd.
Now it appears the only money he'll get from Tyco will be any severance package he worked out with the company.
Mr. Kozlowski quit Tyco in June and subsequently was indicted on charges of evading more than $1 million in sales taxes.
In Tyco's definitive proxy statement, filed with the U.S. Securities and Exchange Commission Jan. 27, the company outlined what Mr. Kozlowski, 55 at the time, stood to earn when he retired at age 65. Mr. Kozlowski, who earned a salary of $1.7 million and a cash bonus of $4 million in 2001, was eligible for a fixed lifetime benefit from the company's non-qualified plan, the "Executive Retirement Arrangement," the present value of which was $343,112 per month, or $4.1 million per year, at the time of the report. Tyco contributed $397,450 to this supplemental, non-qualified plan in 2001.
Mr. Kozlowski also participated in a qualified defined contribution retirement plan, to which Tyco contributed $13,600 on his behalf in 2001.
But under a retention agreement Mr. Kozlowski signed with Tyco in January 2001, he forfeited all his retirement and stock option befits when he resigned. The agreement made clear that if Mr. Kozlowski was fired "for cause" or resigned without "good reason," Tyco would owe him nothing except a possible severance package, according to documents filed with the company's fiscal year 2001 annual report to the SEC.
The terms of the agreement specified "cause" solely as a felony conviction in connection with actions that directly hurt the company. "Good reason" in the agreement deals with any change in ownership at Tyco that results in Mr. Kozlowski's taking a pay cut, changing job duties, losing benefits or having to move his office farther than 25 miles.
Depends on the deal
And what of other fallen chief executive officers, such as Joseph P. Nacchio of Qwest Communications International Inc., Kenneth L. Lay of Enron Corp, Charles L. Watson of Dynegy Inc., Bernard J. Ebbers of WorldCom Inc. and Samuel D. Waksal of ImClone Systems Inc.?
"It's all dependent on the deal they struck when they came in," said Jane Marcus, a partner in the Chicago office of the executive search firm Heidrick & Struggles International Inc. "If history is an indicator, it's unlikely they will get nothing, but we're living in a litigious environment now, so it's hard to say.
"I think the public would love for it to be nothing, though," she added.
When a CEO leaves a firm, any benefits dependent on vesting at a certain age are automatically vested immediately. That means retirement benefits that normally wouldn't begin being paid until age 65 could start being paid as soon as the CEO leaves, regardless of age, said Jan Koors, vice president at Pearl Meyer & Partners, a New York-based executive compensation consulting firm.
As of Qwest's April 8 SEC filing, the company's former CEO, Mr. Nacchio, 52 at the time, had earned a lump-sum benefit valued at $2.3 million, based on his retiring at age 65, annual interest credits of 6% and 4% annual pay increases, from Qwest's $10.8 billion defined benefit plan. He also was eligible for additional benefits earned as part of a separate, non-qualified plan. Mr. Nacchio earned a salary of $1.2 million and a cash bonus of $1.5 million in 2001, according to SEC records filed by the Denver-based company.
But again, whether Mr. Nacchio gets all or any of that lump sum at age 65 depends on how his contract was structured. He resigned in June, at the request of the company's board, amid charges of questionable accounting practices.
Enron's Mr. Lay, meanwhile, was entitled to an estimated $473,556 per year at retirement from qualified cash balance and employee stock ownership plans, according to 1998 information filed the next year with the SEC. (No later information was available.)
At Enron, a provision in the contract Mr. Lay signed in 1996 entitled him to all the assets accumulated in the deferral plans, even if he were fired before age 65, because it treats termination - for any reason - "as if Mr. Lay had retired from Enron," according to the filing.
Patrick McGurn, vice president and general counsel at Institutional Shareholder Services Inc., a Rockville, Md.-based provider of corporate governance services, said Congress may take action on what's perceived as an inequality in retirement benefits between executives and rank-and-file employees. Basically, the message Congress has gotten is that rank-and-file employee retirement plans can disintegrate, while executive plans are guaranteed by the company, no matter what. That's likely to change in coming rounds of pension reform, he said.
Additionally, shareholders will be more vigilant. "These things (contracts) got out of control," Mr. McGurn said. "Clearly, employment contracts for CEOs are going to get unprecedented levels of scrutiny going forward."
The retirement benefits issue is further clouded by the different kinds of retirement packages executives get written into their contracts. Some are tax qualified, and some aren't.
Chief executives generally are eligible to participate in any defined benefit plan offered by the company. This isn't necessarily the most lucrative retirement plan for a CEO making $2 million a year, however, because the Omnibus Budget Reconciliation Act of 1993 lowered the limit on compensation used for qualified pension calculations to $150,000.
To make up the difference, companies have turned to non-qualified plans, such as supplemental retirement plans and deferred compensation plans.
These non-qualified pension plans usually cover only executives and essentially guarantee a pension based on the traditional defined benefit formula of years of service and final annual pay. Sometimes executive contracts "sweeten the deal," according to a report by the AFL-CIO, Washington, by crediting more years of service than the executive actually has worked.
Clinton, Miss.-based WorldCom's Mr. Ebbers was eligible to participate in such a plan, as was Qwest's Mr. Nacchio.
A third kind of non-qualified retirement plan is a split-dollar life insurance policy, said David Root, CEO of D.B. Root & Co., Pittsburgh, which specializes in financial planning for wealthy individuals. The company pays for a life insurance policy on the CEO, and if the executive dies while still employed by the company, the executive's family is entitled to collect death benefits. If the executive doesn't die, the policy becomes a company asset, and when the executive leaves, the company typically grants him or her all or a portion of the value of the life insurance policy.
One potential problem with these non-qualified retirement plans, said William L. MacDonald, president and CEO of Clark/Barde Consulting's compensation resource group, is that the assets in those plans are fair game in bankruptcy proceedings.
"The real story is that even though these executives have multimillion dollar pension plans, they are subject to the claims of creditors," Mr. MacDonald said. "The only thing that's protected is the qualified pension plan."
As much as 90% of what chief executives ultimately get in retirement benefits comes from the non-qualified deferred compensation or supplemental plans, he said. If the chief executive's former company files for bankruptcy protection, that means creditors could take up to 90% of his retirement benefits.
So far, Enron, WorldCom and Global Crossing all filed for bankruptcy protection.
"I don't know that any light has been shed on exactly how this is going to come down, what exactly they (the fallen CEOs) are going to walk away with," Mr. Root said. "It'll be interesting to see how it plays out."