Stuffing one’s face with gorditas from Taco Bell and deep dish from Pizza Hut helps fund the Fortune 500’s most lavish CEO retirement account, according to a recent analysis that may feed fears of income inequality.
David Novak, erstwhile CEO and now executive chairman of the board for fast-food parent Yum Brands, had just $1.6 million socked away in his retirement account as of 2014, according to the company’s public filings. But – thanks to tax code quirks available to top brass but not to Average Joes – he had another $232.6 million stashed in a tax-deferred compensation account, exempt from the annual contribution limits imposed on ordinary 401(k)s.
That put Novak’s total nest egg at $234 million, enough to generate a retirement check of $1.3 million per month through his golden years.
Meanwhile, “hundreds of thousands of his Taco Bell, Pizza Hut, and KFC employees have no company retirement assets whatsoever,” according to the Center for Effective Government and the Institute for Policy Studies.
Yum disputes the latter part of that accusation. More on that in a minute.
The center and institute want to end unlimited tax-deferred compensation for corporate executives, cap how much can be stashed in their retirement accounts and “instead incentivize a dignified and secure retirement for ordinary Americans.”
100 CEOS, $4.9 BILLION
Their study, “A Tale of Two Retirements,” examined data filed with the Securities and Exchange Commission and the U.S. Department of Labor and found that the 100 largest CEO retirement funds were worth a combined $4.9 billion – equal to the entire retirement savings of more than 116 million Americans.
“These massive nest eggs are not the result of CEOs working harder or investing more wisely,” the report says. “They are the result of rules intentionally tipped to reward those already on the highest rungs of the ladder.”
On average, those CEO accounts were worth more than $49.3 million, enough to generate $277,686 monthly retirement checks for each of them, the analysis found.
It’s not just a case of pension envy – though there is always that. These tax-deferred nest eggs also cost the U.S. Treasury, allowing the CEOs to save some $78 million on their 2014 tax bills, the analysis found.
There are three main components that help CEOs feather their retirement nests. The least important is the regular employee pension plan (offered at fewer and fewer private employers these days, for workers at any level). The second is the controversial SERP – supplemental executive retirement plan – which has come under fire from shareholders and is falling out of favor.
The most important vehicle, the report said, was the “executive tax-deferred compensation plans,” similar to a 401(k). That’s where almost half of the wealth lived.
While Average Joes face limits on how much pretax income can go into the 401(k) each year ($18,000 for workers under 50, $24,000 for workers over 50), CEOs and other top executives face no such limits on special deferred compensation plans set up by their companies. Nearly three-quarters of Fortune 500 firms had them for their executives.
“These privileged few are free to shelter unlimited amounts of compensation in these special pots, where their money can grow, tax-free, until they retire and start spending it,” the report says.
Novak’s ginormous nest egg is essentially the product of longevity, great performance and extremely good luck.
PepsiCo spun off Yum in 1997, and Novak was a senior executive with both companies for a combined 29 years, including 15 as CEO of Yum, said Yum spokesman Jonathan Blum in a prepared statement. The company declined to make Novak available for comment.
Novak’s deferred compensation was directly linked to company performance, and it primarily consisted of bonuses he earned and deferred into Yum stock. That stock appreciated more than 800 percent since the PepsiCo spinoff, Blum said.
“He chose to defer the majority of his compensation in Yum stock as he believes in the long-term growth of the company,” Blum said. He noted that total shareholder returns for Yum were 1,100 percent while Novak was CEO, compared with the S&P 500’s 190 percent return.
Yum also said that every company employee in the U.S. is offered a 401(k) that includes a 6 percent, dollar-for-dollar match, with no vesting period and low fees. That “puts it among the very best in the industry and competitive to any employer.”
Based on data the company provided to the U.S. Department of Labor, 8,828 of Yum’s U.S. employees had account balances in a 401(k) plan at the end of 2014, with average balances of $70,167, the “Tale of Two Retirements” analysis found. If converted to an annuity, that would generate about $395 per month.
At the global level, Yum employs 537,000 people, approximately 87 percent of them part-time, according to its filings with the Securities and Exchange Commission. It does not provide country-by-country breakdowns.
HOW WE GOT HERE
This tale of two retirements is the result of good intentions.
In 1993, Congress responded to outrage over CEO pay by capping the deductibility of executive pay at $1 million. That cap, however, didn’t apply to stock options and other “performance-based” pay.
So companies ramped up use of deferred compensation to beef up executive comp without running afoul of pay caps.
“Companies began shoveling out huge amounts of stock-based compensation, which bloated paychecks and encouraged CEOs to fixate on short-term stock prices,” the report says.
Depending on the employer’s plan, execs can often defer an unlimited amount of pretax salary or bonus into these accounts.
“Such is the joy of trying to reduce CEO salaries,” said state Sen. John Moorlach, a certified public accountant. “Those running larger companies are always going to look at ways to transfer income from the corporation to those in the executive suite. The goal is to have a corporate deduction and have the funds transferred be tax-deferred.”
There were laws on the books prohibiting executives from receiving a better retirement contribution than the rank and file, Moorlach noted; tax attorneys simply drafted techniques to get around them.
If Yum’s shareholders don’t like it, they can raise a stink and/or try to remove its board of directors, Moorlach said. If Yum workers don’t like it, they can organize boycotts – which could cost them their jobs, due to declining demand for their products – or work elsewhere. And if consumers don’t like it, they can choose to eat someplace else.
“Then the CEO’s compensation will be adjusted accordingly,” Moorlach said.
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Raphael Miolane, who started in January 2015 after heading Yum! Brands stablemate KFC in central Europe, said Pizza Hut was working on a sig-nificant upgrade to its offering, which currently includes apps with ratings of 2.5 on Android and 1.0 on iOS. Miolane added that he wants to take time to ensure this "delights the consumer".
He admitted that the plethora of delivery services entering the market in recent years meant that UK con-sumers had become "used to very, very convenient interaction", setting the standard for established brands.
However, Miolane said that rushing to make "small fixes" is not the way to catch up.
He added that Pizza Hut had been held back by treating e-commerce as an "IT responsibility and a channel" for too long, failing to accept that it had become the central point of interaction with consumers.
Pizza Hut unveiled a Facebook Messenger ordering bot in the US in August. Miolane would not comment on whether this would come to the UK.
Last week, the brand launched a temporary tattoo that can be tapped with a phone to place a pizza order.