(FORTUNE Magazine) – For a brief, shining moment, it looked as if outrage had finally triumphed over excess. Earlier this month, soon after Delta Air Lines disclosed that CEO Leo Mullin had hauled in a bonus of $1.4 million plus $2 million in free stock in 2002, howls of protest from shareholders and employees prompted a dramatic turnabout. After all, in 2002 the airline had lost $1.3 billion, slashed thousands of jobs, and seen its stock price collapse by 58%. Mullin announced that he was voluntarily slicing his $795,000 salary by 25%, giving up the opportunity to receive a bonus in 2003, and forfeiting another $2.4 million in retention payments due him over the next two years. "In the current circumstances," he said in a memorandum to Delta employees, "the steps I am taking feel right to me."

What apparently didn't feel right to Mullin was the notion of trimming his huge pension--a pension that, by the way, he mostly didn't earn. You see, Mullin has been employed by the airline for only five years and eight months. But a special pension plan that Delta's board created for top executives has credited him--shazam!--with another 22 years of service. Thanks to those phantom years, the 60-year-old CEO could walk away from the airline today and be entitled to receive a payout of about $1 million a year, starting at age 65, for the rest of his life. And if the airline goes bankrupt, no problem: Special Delta-funded trusts protect the pensions of Mullin and 32 fellow executives from creditors. "During these very difficult times in the industry, the board decided that they needed to do something to retain qualified executives," explains a Delta spokesperson.

That level of concern doesn't extend beyond Delta's executive suite. Declaring that its retirement expenses were increasing at an "unsustainable rate," the company announced in November that it was phasing out the traditional pension plan for its 56,000 nonunion workers and replacing it with a less costly version, known as a cash balance plan. Benefits experts say the switch could shrink the expected pensions of older workers by as much as half. The typical pension payout of a 50-year-old flight attendant with 20 years of service, for instance, could easily plunge to $15,000 a year.

Witness the latest--and quite possibly the greatest--double standard in the world of compensation. At the same time big companies are taking an ax to the traditional pension plans of the rank and file, they are funneling millions of dollars into what's fast becoming the ultimate pay-for-nonperformance vehicle: the executive pension plan. In this magical land, years are transformed into decades, and the term "shareholder value" doesn't apply.

And don't think pensions are bit players in the grand scheme of executive pay: Using the most conservative actuarial assumptions, the $4.5-million-a-year pension that former Tyco CEO Dennis Kozlowski is now attempting to collect is worth some $50 million in today's dollars. That's $50 million belonging to current Tyco shareholders.

So why, you may wonder, aren't investors up in arms over these jaw-dropping retirement giveaways? The answer is that hardly anybody knows about them. The complex details surrounding executive pensions are typically buried deep within a company's SEC filings, far removed from the salaries, bonuses, and stock options that dominate the headlines. "It's stealth compensation," declares executive-pay expert Graef Crystal.

Blame the SERP. A SERP (supplemental executive-retirement plan) is a steroid-enhanced version of the traditional defined-benefit pension plan, in which a company sets aside a given percentage of an employee's pay every year to produce a guaranteed payout. SERPs are now offered by about half of all big publicly traded companies, usually only to the CEO and the next dozen or so officers. And while the combination of a collapsing stock market and low interest rates have placed pension plans for ordinary Joes in jeopardy--about 40% of big companies that offer company pension plans are now seriously considering cutting benefits, according to a recent survey by accounting firm Deloitte & Touche--that's not the case for top execs. In fact, now that the stock market bubble has burst, compensation experts predict that companies will actually increase their use of SERPs to pick up the slack. "A lot of companies that relied on stock options and equity to provide wealth accumulation are beginning to look for other ways to round out the program," says Ann Costelloe, a senior consultant in the executive-compensation practice of benefits firm Watson Wyatt.

Here's the kicker: SERPs aren't subject to the same restrictions that govern tax-qualified retirement schemes, so corporate boards have free rein to use them to deliver virtually any amount of money to an executive at any time--even if he's on his way out the door. Consider Terrence Murray, who stepped down as CEO of FleetBoston in 2001. Murray had worked at the company for 39 years, and he had already racked up a $2.7-million-a-year pension under his existing SERP. Just months before he retired as CEO, the board amended his plan to include not only salary and bonus toward his pension-eligible compensation but also the value of stock options he had exercised. That flick of the pen boosted Murray's pension to a staggering $5.8 million a year. According to the company's proxy filing, the board's largess was prompted partly to reward Murray for his long track record of success but also by a "review of market practices in this area."

Ah, yes: keeping up with "market practices." Thanks in part to that inexorable force, what Delta did--add years of unearned service to a top exec's pension plan--has become routine. CEOs at scores of companies, including Mike Armstrong at AT&T, Larry Weinbach at Unisys, and Jeff Barbakow at Tenet Healthcare, managed to get the equivalent of years--sometimes decades--of service tacked onto their pensions. Many companies argue that they offer this sweetener to "make whole" a new executive who has accumulated several years of service in his old company's pension plan. But the practice makes a mockery of what pensions are designed to do: reward loyalty. And the shareholders of the companies who hire job-hopping CEOs are left holding the bag.

Not that shareholders are likely to know the true extent of the damage. Companies aren't required to break out the amount they spend on executive pensions in their financial reports. "Companies are just throwing extra money at these top people, and there seems to be no valid explanation why," says Peter Clapman, chief counsel for the $250 billion institutional money manager TIAA-CREF.

Nevertheless, corporate boards seemingly stop at no expense to protect the pensions of their top guns--even as their companies careen toward financial ruin. Scores of big companies, including Motorola, Advanced Micro Devices, and Altria (formerly Philip Morris), have set up special pension trusts similar to Delta's to protect executive nest eggs in the event of bankruptcy. For shareholders, the arrangements carry a big pricetag. That's because when a company puts money into one of the trusts, the executive on the receiving end is taxed. So the company shells out even more money to pay the IRS tab. For instance, when Delta deposited $4.5 million into Mullin's pension trust, it also gave him $3.7 million in tax "gross-up" payments.

Airlines are the biggest offenders. UAL (the parent of United Airlines), for instance, plowed $4.5 million into a pension trust last September for its new CEO, Glenn Tilton, just three months before the airline filed for Chapter 11. At US Airways, Stephen Wolf took his pension in a lump sum of $15 million when he stepped down in March 2002, just six months before the company filed for Chapter 11. (That $15 million included 24 years of service Wolf never performed.) "While thousands of pilots will retire with only a fraction of the pension benefits they earned and expected, airline executives can look forward to retirement knowing that their nest eggs are solid gold," says captain Duane Woerth, president of the Air Line Pilots Association.

Jacked-up executive pensions present yet another danger for the shareholders of any company that offers them: Those guaranteed seven-figure payouts bear absolutely no relation to performance. The only real requirement of the executives who receive SERPs is that they stick around for a while--typically five years or less. Often they don't even have to do that. That's because virtually all employment contracts negotiated by top executives contain clauses that entitle them to receive their pensions in full if they are terminated at any time "without cause."

Hence the $1.6-million-a-year pension being collected by Richard Brown, former chairman and CEO of EDS. He was booted from the company in March after four tumultuous years in which the stock price fell by 62%. Under the terms of his employment contract, Brown would get an additional 16 years of service for pension purposes after he had put in five years' service. But since he was terminated "without cause," he got credited for the 16 years anyway. "He was a much sought-after executive back in 1998, so we had to offer a very competitive package," says Jeff Baum, an EDS spokesperson.

The ever-growing disparity between the retirement nest eggs being built up by executives and by rank-and-file employees is perhaps best personified by John Snow. He stepped down as CEO of CSX in January to become the Bush administration's new Treasury Secretary. Now he is set to rule on a set of pension regulations proposed by the Bushies that would let companies convert their traditional pension plans to the "cash balance" version--the kind that can cut the pensions of older workers by 50%. Meanwhile, he received an extra 19 years of service that he never performed, then cashed out his pension as a lump sum of $33 million. "John Snow's pension benefits are consistent with executives' at FORTUNE 500 companies," says a CSX spokesperson.

And that, of course, is exactly the problem.