Boeing announced yesterday that 65-year-old Chairman and CEO James McNerney will retire as CEO next month. In the list we compiled of overpaid CEOs, McNerney was number 54. His total disclosed compensation was $23.2. In 2014, it increased by 24% to $28.8 million.
Though he will no longer be CEO, he will remain at the company as employee chairman, with a salary of $1.5 million through the end of February next year. He is expected to perform services “at a level equal to 50% or more of the average level of service” performed prior to this. Among his duties during this time as described under the transition agreement: facilitating introductions, as requested by the new CEO “to major stakeholders, government officials and others.” This particular task might be reasonable if the new CEO Dennis Muilenburg was from outside the company, but he’s been at Boeing since 1985, considerably longer than McNerney.
In addition, the board agreed to provide him with accrued benefits as stipulated in the employment agreement that became effective July 1, 2005.
The most astounding component of McNerney’s package however, is his retirement payments. Under his employment agreement, he has a “target benefit” that the company describes as “calculated as a straight-life annuity commencing at age 62 payable from Boeing (including qualified pension benefits, nonqualified pension benefits and the employment agreement) that is offset by pension benefits payable by his previous employers, 3M and General Electric. This target benefit is 50% of Mr. McNerney’s highest average annual compensation (annual base salary plus annual incentive compensation).”
In the agreement average annual compensation is defined as “the highest three years out of ten.” Interestingly, his for 2014 under this definition was 11% higher than the previous year. The company notes that, “For service accrued through December 31, 2014, the target benefit (before reduction for other provided pension benefits) was $3,184,500 per year.”
This is only one component of his agreement. According to the most recent proxy that 12/31/2014 value was $34.3 million, but he has two other plans. His SERP (Supplemental Executive Retirement Plan) that was worth $11.8 million in that 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.
This case highlights one problem with auto-renewing agreements and employment agreements in general, they are notoriously hard to alter even as best practices evolve. The company’s “Pension Value Plan (“PVP”) and Supplemental Executive Retirement Plan (“SERP”), two defined-benefit retirement plans that do not require employee contributions” are only available to executives hired before January 1, 2009.” Effective December 31, 2015 no further pension benefits will accrue under these plans, even for eligible executives such as Muilenburg. Instead, the executives will transition to defined contribution plans.
McNerney, however, as detailed above, has done very, very well for himself. And while shareholders have done well under his tenure, there are reasons to be concerned about long-term sustainability at Boeing. Peter Cohan has an excellent article in Forbes that cites Teal Group Vice-President Richard Aboulafia: McNerney “boosted Boeing’s financial performance but left big problems. ‘He was very good for the company’s short-term financial performance. But he leaves behind a legacy of some of the worst labor relations this industry has ever seen.’”