CEO Pensions Encourage Earnings Games

Posted by: Nanette Byrnes on October 23

A new study finds that it’s not just the outsized pay packages executives at AIG, Citigroup and others receive that is a problem. Nor are the golden parachutes given those forced out the only thing that deserves scrutiny.
Regular run-of-the-mill CEO retirement has become a reason for CEOs to goose the numbers.
The study by Paul Kalyta of McGill University finds that a CEO whose retirement pay depends in part on the company’s performance in his final years at the helm, will manage earnings up as he approaches retirement. After he’s gone, the stocks tend to drop sharply.
By contrast, companies whose CEOs don’t have this type of provisions in their Supplemental Employee Retirement Plan, or SERP, don’t suffer similar spikes and drop offs.
SERPs have become popular as a way to get around regulations that limit the tax deduction of executive pay. About three fourths of the largest companies have such plans, the study notes. But not all depend on the performance of the company in the CEOs final years.
“There is significant room for discretion in accounting, and CEOs can use this for a variety of purposes,” notes Kalyta. “To use it for essentially selfish reasons, even when legal, certainly raises ethical questions, particularly when, as this research reveals, doing so destroys a considerable amount of shareholder value.”
The full study, which has been published in The Accounting Review, a journal of the American Accounting Association, can be found here.

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