Retirement plan scrutiny heightened.

The furor over former New York Stock Exchange Chairman Richard A. Grasso's $140 million retirement pay package, consultants say, assures that retirement plans will be getting more corporate scrutiny, and more disclosure, in the months ahead.

Ironically, the Grasso flap was touched off after the NYSE voluntarily disclosed the package. But as it was picked apart amid an avalanche of news stories over several weeks, it came as a shuddering reminder to corporate boards that they had another governance issue on their hands.

Nonqualified retirement plans like Supplemental Executive Retirement Plans, or SERPs, have been commonplace in U.S. companies for years. Their primary intent is to ensure that highly compensated executives are allowed to put aside a comparable percentage of their pay for retirement as are lower-paid workers; current U.S. law restricts salary deferrals on qualified plans like 401 (k)s to $11,000 a year.

"American businesses have long recognized that nonqualified retirement plans can be effective in helping to attract and retain key executives and employees," says Leonard Wilson, an executive benefits consultant with The Todd Organization, headquartered in Greensboro, N.C. Moreover, many companies offer more than one nonqualified plan--and sometimes several--including Supplemental Executive Savings Plans (SESPs) and capital accumulation plans.

A survey done recently by Todd, analyzing 2002 proxy data from almost 2,000 companies with more than $250 million in annual sales found:

* While 98 percent of the companies offered a qualified defined benefit and/or defined-contribution plan to employees, 71 percent of these companies offered one or more nonqualified retirement plans to key employees.

* Larger companies are more likely to offer nonqualified plans, though qualified plans are in place throughout companies, regardless of revenue.

* Ninety-six percent of companies that offer an executive deferred compensation program also offer a 401(k) plan, while 84 percent of companies that offer a SEEP also provide a defined benefit pension plan.

Tom Wamberg, chairman and CEO of Clark Consulting, notes that there is no immediate taxation on cash deferred through a SERE, which is carried as an account balance on the books. In retirement, a SERE normally distributes an annuity payment, and there is a cash expense to the company at the time of the payment.

Typically, he adds, a SERP might be structured so an executive would receive 50 percent of his or her final salary, minus pension and Social Security payments. That difference is what the company would accrue for to fund the SERP

Some compensation consultants fear that SERPs could be getting an unfair rap as a result of recent news coverage. "I hope there are not other [problem situations] out there," says Brent Longnecker, president of the Resources Consulting Group in Spring, Texas. "We want executives to be fairly compensated--and they aren't under traditional 401(k) rules for highly compensated individuals--and we want them to retire on time, and not create bottlenecks. We need better disclosure and better analysis."

He adds, "SERPs are great tools, and I like seeing [company] matches. But you don't want them to get excessive. There is one big bucket called 'reasonable compensation,' and it can't overflow."

A key issue that will draw more scrutiny, says Longnecker, is relative pay levels, which he calls "indexing." A good consulting firm will look at the compensation given the number 2 and number 3 executives in the company, he notes. Usually, that ranges around 50 to 85 percent of the top person's pay; if it is much lower, that suggests the CEO's pay is out of whack.

Disclosure of non-qualified plans will be a big feature of the 2004 proxy season, consultants predict. Fixed-rate payments to top executives will be "a lightning rod for exposure," says Wamberg, "You can have a fixed-rate account in deferred compensation," but it needs to be a reasonable number, more like 4 percent than 8 percent, he says.

"In the next proxy season, what took four paragraphs to explain will probably take eight paragraphs, or maybe more," Wamberg adds. "We're advising our clients to over-disclose and over-explain."

But it's unlikely that plans like SERPs would be shelved simply to avert a possible public relations blowup. Says Long-necker: "If your goal is to provide a 50 percent final average income [for executives], you're still going to do a SERP."

Prevalence of Specific Types of Retirement Plans

                                                     Defined-
                                        Executive    Benefit
                          Qualified     Deferred     Pension
Revenue                      401(k)   Compensation    Plan      SERP

$5 billion+                     89%        80%         73%       72%
$billion-$5 billion             96%        68%         54%       54%
$250 million-$1 billion         95%        46%         30%       28%

Total/Average                   94%        59%         45%       43%

Source: The Todd Organization