Estimated Annual Retirement Benefit: $4,550,000*
*Calculated by The Corporate Library for the AFL-CIO Executive PayWatch
IBM CEO Samuel J. Palmisano will receive an estimated annual retirement benefit of $4,550,000 when he retires. Under IBM’s Supplemental Executive Retention Plan, Palmisano’s yearly pension benefit is calculated based on his average annual salary and bonus of his five highest consecutive years of compensation.
While Palmisano can look forward to a guaranteed annual pension for the rest of his life, many IBM employees will not be so lucky. IBM recently announced that it will freeze all its workers’ pensions beginning in 2008. The company said this move will help make pension costs “more predictable” and save up to $3 billion over the next few years.
Instead of receiving a defined-benefit pension when they retire, IBM employees will participate in a 401(k) defined contribution plan. Under a 401(k) plan, workers bear investment risk and may run out of money in their retirement. In contrast, defined-benefit plans are guaranteed by the government and provide a lifetime of income.
When IBM’s expected pension freeze goes into effect in 2008, Palmisano will have earned approximately 34 years of pension service out of a maximum of 35 years. This is not the first time that Palmisano has had fortuitous pension timing. Palmisano’s pension formula also was exempted from IBM’s pension changes in 1999.
In 1999, IBM converted its defined-benefit pension plan to a cash-balance plan in order to save $200 million. This move was found later to have illegally discriminated against older employees when they sued to protect their pensions. Then in 2004, IBM closed its pension plans to new workers. During these pension plan revisions, Palmisano’s benefits were not changed because he was within five years of retirement eligibility.
Since 1995, executives also have participated in IBM’s Executive Deferred Compensation Plan. This plan is similar to a 401k plan, except that executives making more than $1 million may contribute up to 100 percent of their salary in order to save on taxes. In 2005, IBM contributed $205,650 to Palmisano’s deferred compensation accounts.
