Abstract: Because public firms are not required to disclose the monetary value of
executives’ pension plans in their executive pay disclosures, financial economists
and the media alike have generally analyzed executive pay using figures that do not
include the value of such pension plans. This paper presents evidence that omitting
the value of pension benefits significantly undermines the accuracy of existing
estimates of executive pay, its variability, and its sensitivity to performance. We
estimate the value of the pension plans of all CEOs of S&P 500 firms that left their
positions during 2003 and the first half of 2004. For the set of companies whose
executives had a pension plan (68% of companies), our findings are as follows:
• The executive’s pension plan provided an annual payment with an average
value of $1.1 million (ranging from $360,000 to $2.3 million) and had an average
actuarial value of $15.1 million (ranging from $3.3 to $41.3 million).
• The pension value was on average nearly three times the total salary the
executives earned during their tenure as CEO, and it was equal on average to 44% of
the total compensation (including both equity and non-equity pay) the executives
received during their service as CEO.
• Including pension values increased the fraction of compensation made of
salary-like payments (salary during service as CEO and pension payments
afterwards) from 16% to 39%, and reduced the fraction of pay that is equity-based
from 57% to 42%.
We conclude that the standard omission of pension plan values by researchers
and the media leads to:
(i) Significant underestimation of the magnitude of executive pay,
(ii) Severe distortion of comparisons among executive compensation
packages, and
(iii) Significant overestimation of the extent to which executive pay is linked
to performance and the fraction of compensation that is equity-based.