Today Boeing announced that CEO James McNerney will be retiring, and I spent some time digging into the retirement agreement. Prepare to have your jaw drop as I take you through how the company (and shareholders) are providing for his (literally) golden years.
First of all, it is important to note that he’s not retiring immediately. He will step down as CEO in July but will remain an employee and Chairman of the board through next February. The company calls that “the transition period” and he will be paid salary at a rate of $1.5 million as well as being eligible for annual incentive.
But wait, there's more . . .
Don’t worry though, he won’t be expected to work full time for that pittance. He’s expected to work at least half time. Specifically, he is expected to perform services “at a level equal to 50% or more of the average level of service” performed in the prior 36 months. His duties will include – the agreement says this -- facilitating introductions, as requested by the new CEO “to major stakeholders, government officials and others.” This would make more sense if the new CEO Dennis Muilenburg was from outside the company, but he’s been at Boeing since 1985.
In the announcement today the company stipulates many things clearly, but other things are vague. For example, a sentence states that upon his retirement he’ll receive: “all Accrued Amounts (as defined in the Employment Agreement) as specified in Section 8(a)(i), (ii), (iii), (iv) and (v) of the Employment Agreement.” When I see a sentence like that it makes me want to dig.
The agreement it referred to was an employment agreement that was filed in 2008. And section 8, well that’s what he was supposed to get if he left the company due to disability.
In the agreement disability is defined as, “the inability of the Executive to have performed his material duties hereunder due to a physical or mental injury, infirmity or incapacity for 180 days (including weekends and holidays) in any 365-day period.” But, c’mon the retirement date is not for another nine months.
So obviously there’s no way of telling that he’ll be unable to perform duties in the future. And presumably the board wouldn’t keep him on as an employee chairman if he had an infirmity. The board just made the decision to give him the disability departure package.
Because . . . because they could. (As an aside, this is what bugs me about investors who get the companies to adopt policies and then vote in favor of pay – I’m looking at you TIAA-CREF – those policies, those definitions that sound reasonable, they can be changed at any time.)
McNerney gets a lot of things under that disability package. I’ll only highlight one here: payments for unused vacation days. Now under his 2008 agreement he is entitled to take at least 4 weeks per year (or in contract language whatever other executives get but: “in no event less than four (4) weeks per calendar year.”) We don’t know how many he took, many CEOs somehow never manage to take vacation days, adding up to a generous lump sum upon their departure.
And now to summarize his retirement package.
If you work with a retirement planner they might suggest you think about what you will need to live on in retirement, what target income do you need. Under McNerney’s agreement his target benefit is 50% of his highest average annual compensation (defined as annual base salary plus annual incentive compensation). The average annual compensation used is the highest three years out of ten including compensation at prior employers. I’m sure this is totally a coincidence, but his pay for 2014 under this definition was 11% higher than the previous year.
Anyway, as noted in the proxy statement, “for service accrued through December 31, 2014, the target benefit (before reduction for other provided pension benefits) was $3,184,500 per year.”
Let’s just think about that a moment, a pension of over $3 million a year. Guaranteed.
This is only one component of his retirement, under the employment agreement.
According to the most recent SEC filing on this the current value of that one is $34.3 million, but he has two other plans, one called a SERP (Supplemental Executive Retirement Plan) that was worth $11.8 million in the last disclosure, and the standard pension plan, worth less than half a million dollars. He also has a deferred compensation plan, in which the company matches part of his contributions. The value of that one at the end of the last fiscal year was over $2.5 million.
So bottom line, I think he’s going to make it. I think he’ll be alright in his retirement.
I’m not sure about the rest of us though.