An Access Advertising EconBrief:
Is It Time to Start Selling The Wall Street Journal at the Grocery Store Checkout?
For three-quarters of a century, The Wall Street Journal has been one of the world’s financial periodicals of record. It has battled London’s Financial Times for supremacy since about the time that the sun set on the British Empire; i.e., the close of World War II. World leadership is a responsibility not lightly assumed or relinquished, and the Journal has taken its role seriously.
The American press has long followed the Journal‘s lead on financial and economic stories, citing it as the primary source of information and analysis. Business schools and economics departments at colleges and universities have offered Journal subscriptions at reduced rates, both to whet student interest and improve the student’s vocabulary and grasp of fundamentals. The need for an intermediary between the public and the professional elite of business, finance and economics is perennial. It has never been greater than today, when the tools of the trade are sophisticated and complex and the threat of economic collapse looms.
The advent of the Internet drove a stake through the heart of the American newspaper business, which had preyed on its public. High advertising rates, particularly for classified ads, were its life’s blood. Its left-leaning editorial stance gradually alienated its readership. Despite declining circulation, the industry obstinately continued to disdain its customers. The Journal and USA Today were lonely exceptions to this trend. Virtually alone, they have maintained circulation and operational scale.
Still, ominous signs are visible. The most disturbing has been the obvious divergence in viewpoint between the editorial page and reporting in the Journal. Technically, reporting is not supposed to reveal a viewpoint; it is supposed to present the “who, what, when, where, why” of the news impartially. Nowadays, though, this is apparently considered passé. And the viewpoint of Journal reporters is left of center, albeit to the right of (say) Mother Jones or The Nation. Meanwhile, Wall Street Journal editors remain a rare bulwark of support for free markets and political conservatism in the print media.
But that disturbing divergence is not stable. The Journal‘s reporting is showing increasing signs of the economic illiteracy and rabid anti-business, anti-market populism that characterizes the popular press. The latest example appeared in the Tuesday, June 25, Wall Street Journal‘s “Marketplace” section. The headline read: “McKesson CEO Due a Pension of $159 Million.”
The $159 Million “Pension”
The article’s byline belongs to one Mark Maremont. The piece opens with the unfavorable characterization of “executive pension plans [that] sometimes grow to a hefty size…as extra retirement cushions for long-serving CEOs.” The curious description of a retirement plan as an extra retirement cushion is advance notice that class warfare is about to break out. After all, the executive pension itself may run to millions of dollars, so it is difficult to justify the pejorative use of these words except as a lubricant for class envy.
That is merely the warm-up for the lead that, contrary to standard journalistic practice, follows in the second paragraph. “Then there’s the record $159 million pension benefit of John Hammergren, the current chairman and CEO of drug distributor McKessonCorp. That’s how much he would have received in a lump-sum benefit had he voluntarily departed on March 31,” according to a company proxy filing.
Mr. Maremont cites unnamed compensation consultants who declare this the largest pension on record for a public-company CEO, and maybe the largest in history. His one named source, James Reda of Gallagher HR Consulting, calls the pension “excessive” because Mr. Hammergren has been very highly paid in recent years. (Mr. Hammergrens annual compensation has averaged over $50 million.) Understandably, Mr. Hammergren refused the opportunity to comment on Mr. Maremont’s findings.
That is understandable because it is difficult to remain both calm and lucid in the face of anything so outrageous. Begin with the obvious; namely, the article’s characterization of the $159 million as a “pension.” To just about everyone in the English-speaking world, the word “pension” connotes a fixed, periodic (classically, annual) payment made according to the terms of a retirement plan. It is essentially synonymous with what insurance calls a “guaranteed life annuity.” Merriam Webster’s Collegiate Dictionary lists “a fixed sum paid regularly to a person” as the first definition of “pension.” According to Wikipedia:
A pension is a contract for a fixed sum to be paid regularly to a person, typically following retirement from service. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum. The terms retirement plan and superannuation refer to a pension granted upon retirement of the individual.
Given the everyday meaning of the word “pension,” a $159 million pension certainly ought to be a record. The sight of that headline must have set eyes rolling and brows rising throughout the world, because it said that McKesson’s CEO would receive $159 million a year for the rest of his life the equivalent of winning a lottery every year. And it is perfectly obvious that he will get nothing of the kind.
Those two words, “lump-sum benefit,” in paragraph two of Mr. Maremont’s article, are the tipoff to the charade he is staging. Diehard readers who inspect all 24 paragraphs of the article and its accompanying 13-paragraph sidebar detailing the calculation of Mr. Hammergren’s “pension,” eventually learn the truth; namely, that what Mr. Maremont calls a pension is closer to what Wikipedia calls a “severance.”
In journalism as it was formerly practiced – that is to say, reputable journalism – accuracy and clarity were the watchwords. Style and viewpoint were never issues. And political issues such as the fairness of CEO compensation belonged on the editorial page, not the front page of the “Marketplace” section. Ambiguity about the meaning of the word “pension” would never, ever have been allowed to mar the meaning of a story.
If It Doesn’t Waddle Like a Duck, Quack Like a Duck or Have Feathers…
One has the paralyzing suspicion that, when pressed to account for his conduct, Mr. Maremont would reply with a shrug, “But McKesson calls it a pension. I just accepted their terminology. It wasn’t my place to question or interpret it.”
If the Journal received a fisherman’s report touting a “world-record sardine” weighing a ton, possessing a pointed dorsal fin, skin instead of scales, double rows of sharp teeth and two unblinking eyes, would it unquestioningly print this account unedited and unqualified? Would it put “world-record sardine” in the headline, burying the likelihood that the sardine was really a shark somewhere in the fine print of the article?
Presumably not. But that is what the Journal has done here. We know this because Mr. Maremont himself grudgingly discloses it over the course of the article. After having spent the first 17 paragraphs implicitly flogging McKesson (and, by implication, Mr. Hammergren) for trying to put something over on shareholders and the public, Mr. Maremont comes clean about what is really going on. In paragraph 18, he discloses that in 2006 federal regulators changed the rules of disclosure for executive pensions. Under the new rules, companies were required to calculate a present discounted value for the pension each year under the hypothetical assumption that the executive retired that year.
Like many regulations, this initially seems weird and pointlessly complicated but actually has a logical purpose behind it. One obvious way to enable shareholders and analysts to understand how much executives are being compensated by boards of directors is to compare their compensation with that of executives at other firms. But coming up with a valid comparison for executives in different circumstances – different ages, different health profiles, etc. – is impossible without finding a format in which relevant values can be expressed in a common denominator. Thus, regulatory requirements have demanded that companies express compensation in just that common-denominator form – the present discounted value of the future pension payments. This is evaluated in various termination contexts, one of which is current termination of service.
And that is that Mr. Hammergren’s reported McKesson “pension” represents – not a pension in the generally understood sense, but in this special regulatory sense. There is no way under heaven that this pension – a lump sum representing the present discounted value of all future pension payments – belongs in the same comparative category as an ordinary “annual pension,” which is only one of those payments that gets discounted in computing the lump-sum payment. The lump sum can be compared to other executive pensions that are expressed identically – and this is the only comparison in which it should figure. Presumably, this is the comparison Mr. Maremont really refers to when he claims “record” status for it. Or rather, that is presumably what he would say if called upon to defend his article.
It is impossible to believe that a bylined reporter on the world’s leading financial daily could or would innocently mislead readers by suggesting one thing, then reluctantly and inferentially removing the suggestion through information supplied later. There is no innocent explanation; Mr. Maremont is either too incompetent to realize that he has confused his readers or he intended to profit from the confusion. That is, he is either a fool or a knave. There is no third possibility.
Either way, the episode indicates that The Wall Street Journal should take its place alongside The National Inquirer and News of the World on the tabloid rack at the grocery-store checkout.
Never Ascribe to Venality That Which Can be Explained by Mere Stupidity
Was Mr. Maremont devious or merely stupid? That remains to be determined. There is evidence on both sides.
Go back to the beginning of the article, where Mr. Maremont cites James Reda’s denunciation of McKesson’s lump-sum pension benefit as “excessive” because Mr. Hammergren is already making so much money. This is bizarre, to say the least. Every compensation specialist knows that the foundation of the pension calculation is the employee’s salary or wage. Mr. Hammergren is making lots of money, so of course his lump-sum benefit will be relatively large; that is how the system works.
But that’s not all. For years, the political left has complained about benefits that are not tied to performance. Here, Mr. Hammergren’s benefit is tied to his performance, which is a key factor in Mr. Hammergren’s high pay. “Under his leadership, the company’s stock price has more than tripled, significantly outperforming the overall market.” This came after his ascension to co-CEO in 1999 “after an accounting scandal decimated the company’s top ranks and led its stock to tank.”
Next, consider Mr. Maremont’s handling of the discount rate, which is usually the most contentious issue whenever the matter of present discounted value arises. In order to value benefits scheduled to occur in the future, a means to reduce the future value to its current equivalent must be found. The theoretically correct way is by “discounting” them; that is, dividing the benefit by a discount factor that embodies the relevant opportunity cost of generating the benefit. In the special case of a perpetuity – a fixed sum available forever – the perpetual benefit is divided by 1 + i, where i represents the interest rate or discount rate that reflects the opportunity cost. The general principle applies in slightly more complicated form to non-perpetual future benefits, which are discounted and summed to yield the present discounted value.
Mr. Maremont implies that the discount rate used by McKesson inflates the value of Mr. Hammergren’s pension; e.g., that it would give him too much money if he retired this year. Moreover, this point is anything but academic since he also says that “McKesson pays its executive pensions as a lump sum rather than annually.” Apparently, the company computes the pension in the conventional manner, using a formula based primarily on the executive’s final salary, years of service and performance. Then, using actuarial age to derive the length of the future payments, they calculate the present discounted value of the pension and pay it.
Mr. Maremont claims, quite correctly, that the selection of the discount rate can influence the outcome of the calculation. In general, the lower the discount rate, the higher will be the present discounted value. Mr. Maremont claims that “most firms” use “a rate set by the Internal Revenue Service of about 3.7% for a similar-age person [to Mr. Hammergren].” Thus, according to Mr. Maremont, McKesson’s chosen rate of 1% results in a windfall of some $52.4 million to Mr. Hammergren, compared to the IRS rate.
A good way to start a fistfight in a roomful of economists is to pose a problem involving selection of a discount rate. No problem is more contentious among forensic economists, the occupational niche that specializes in hiring out their services for legal testimony on valuation, regulation and antitrust. There is an excellent a priori case for assuming that “most firms” accept the IRS valuation simply because they don’t want to start a beef with the IRS, not because the government is a better economic evaluator of discount rates than private firms.
But rather than debate that point at length, ponder the implications of another admission by Mr. Maremont. “Mr. Hammergren will be eligible for full retirement benefits next year, when he turns 55. If interest rates rise, his lump-sum pension could decline [my emphasis].” Mr. Maremont’s conditional prediction clearly suggests that McKesson chooses the discount rate by linking it to current market rates, perhaps by pegging it to an interest-rate index. Indeed, this is just the sort of discount-rate-choice mechanism that appeals to economists generally. And this is tremendously important, not only to Mr. Hammergren but to our analysis, since it means that the CEO’s pension is running interest-rate risk. This would be important under any circumstances, but in today’s world it makes Mr. Maremont’s casual remark that “his lump-sum pension could decline” just about the biggest understatement since Noah said it looks like rain. If the difference between 3.7% and 1% is worth a $52 million gain to Mr. Hammergren, how big do you suppose the loss would be if interest rates rose from the (indexed) 1% up to 7%, or 10%, or 15% or 20%?
The Fed has just announced its anxiety to end the QE process. The market reaction has fallen just short of complete hysteria. Interest rates have already risen markedly. An interest-rate rise that could cost Mr. Hammergren tens of millions of dollars between now and next year is entirely plausible. This loss of value would occur within his retirement account, on the putative eve of his retirement. Elsewhere in the article, Mr. Maremont bemoans the special privilege ostensibly given to executives by these pensions and the detriment suffered by “rank-and-file employees” who have been stuck with defined-contribution plans instead defined-benefit (e.g., pension) plans. Yet now, in the face of his own admission of the special risk Mr. Hammergren is running, Mr. Maremont suddenly becomes analytically mute.
This is clear evidence of bad faith on his part – venality rather than mere stupidity.
Come to think of it, wouldn’t it have made much sense to run a piece on the phenomenon of companies paying executive pensions in lump-sum form rather than in standard life-annuity form? This would have alerted the general public to the existence of this new form of “pension” while simultaneously providing a valid forum in which to compare executive pensions in a truly valid way. For example, Mr. Maremont’s chart shows two line items – “added years of service” and “boosting bonus in formula” – that account for $50 million worth of the $159 million. We cannot evaluate them because he does not give us any information about them, but a genuine news article might have had the time and space to remedy that omission. This would have been The Wall Street Journal operating in traditional fashion; reporting the news and the facts, educating the public while informing them. But Mr. Maremont couldn’t very well have profited from the ambiguity attached to a “pension” by dispelling that ambiguity. That would have nixed the class-envy angle that apparently motivated him, and these days it’s the angle that drives the story.
Just about the time that the triumph of venality seems complete, the reader’s eye is caught by Mr. Maremont’s assertion that McKesson’s 1% discount rate “increased the size of its chief’s lump-sum pension benefit 52%, according to Bolton Partners Inc.” Wait a minute – Mr. Maremont’s chart shows a gain of $52 million (actually, $52.4 million), but now the gain is instead 52%? Confusing dollars with percentages is just plain stupid.
It’s beginning to be clear were our aphorism came from. It may derive from the fact that stupidity and venality are not independent of each other but positively correlated. Consequently, when they arise it becomes difficult to sort out their effects.
It isn’t difficult, alas, to associate their incidence with the decline of a great newspaper.