Resolved: The
shareholders of AT&T Corporation request the Board to adopt a policy that
determines future awards of performance-based compensation for executive
officers using a measure of earnings that excludes non-cash “pension credits”
that result from projected returns on employee pension fund assets.
In recent years a substantial share of the
Company’s reported earnings has not been cash flow from ordinary operations,
but rather accounting rule income from “pension credits.” Because pension credits reflect neither
operating performance nor even actual returns on company pension assets, we
believe these credits should not factor into performance-based compensation.
Pension credits are not based on actual
investment returns, but on the “expected return” on plan assets and other
assumptions set by management. For example, management added $1.3 billion in
pension credits to earnings in 2001 through 2002 based on a projected $5
billion net gain on pension investments.
In reality the pension trust lost $2.9
billion over this period. Meanwhile the
pension surplus deteriorated from $9 billion to less than $1 billion by
year-end 2002.
We believe pension income is not a good measure
of management’s operating performance.
Indeed, Standard & Poor’s excludes pension income from its measure
of Core Earnings, adopted to promote transparency and consistency in reported
earnings. According to S&P’s Core
Earnings Market Review: “Since [pension income] is based on the expected,
not actual, return [on pension assets], this money may not even exist. Further, if there is income, it remains in
the pension fund and is not available to the corporation.”
AT&T’s 2003 annual report shows pension
credits boosted reported earnings by nearly $1.3 billion over the prior three
fiscal years (2000 to 2002). In 2001 and
2002, pension accounting credits added $277 and $232 million, respectively, to
AT&T’s pretax net income. And in
2000, pension credits of $775 million accounted for nearly one-fifth (19.7%) of
AT&T’s pretax income, according to Credit Suisse First Boston (“A Pension
Accounting Primer,” June 2001).
We believe
boosting performance pay with pension income also creates incentives contrary
to long-term shareholder interests. For
example, according to a Wall Street Journal report (June 25, 2001),
“companies can use pension accounting to manage their earnings by changing
assumptions to boost the amount of pension income that can be factored into
operating income.”
In our
opinion, if incentive pay formulas encourage management to skip cost-of-living
adjustments expected by retirees, or to reduce expected retirement benefits (as
we believe AT&T did in switching to a cash balance pension plan),
AT&T’s ability to recruit and retain experienced employees could be
undermined.
Because AT&T’s management retains great discretion
over the assumptions used to calculate pension credits, we believe that
excluding this accounting rule income from calculations of executive pay would help assure
shareholders that this discretion will not lead to conflicts of interest.
Faced
with similar resolutions, the boards at General Electric, Verizon and Qwest
voluntarily adopted a policy of excluding pension income from calculations of
performance-based pay.