2007 is the first year that companies must divulge in their annual proxy statements all of the lavish perquisites they offer their highest-paid executives—ranging from the personal use of corporate aircrafts, helicopters, and cars to company-paid country club memberships and home alarm systems. And according to a Compliance Week analysis of the perks offered by 250 large companies included in the S&P 500, such spending is way, way up.
The increased disclosure has caused spending on “all other compensation” for executives to balloon from a median $269,640 in 2005 to $787,200 in 2006. Average “all other compensation”—skewed by several extremely large amounts from a few companies—went from $985,900 to $2.32 million.
The new disclosures come on the heels of revised proxy rules issued last year by the Securities and Exchange Commission, mandating that companies disclose perks where the aggregate amount equals $10,000 or more. Previously, the threshold requirement was 10 percent of total annual compensation, or $50,000.
The most popular perk for top executives: personal use of corporate aircraft, a gift offered by 76.4 percent of companies. Pharmaceutical giant Pfizer, for example, offers its executives and accompanied guests 20 hours of personal use on each corporate jet and helicopter. The usage comes at a total cost of $314,064 a year. In its proxy, Pfizer justified the expense by saying that the perks “provide flexibility to the executives and increase travel efficiencies, allowing more productive use of executive time, in turn allowing greater focus on Pfizer-related activities.”
Other popular benefits include Supplemental Executive Retirement Plans and tax-preparation services, offered by 70.4 percent and 68 percent of the companies, respectively. Coming in last were home-security systems, offered by only 37.2 percent of companies.
Some companies, including Wells Fargo, Lockheed Martin, and Walt Disney, spare no expense—showering their executives with all of the attractive benefits.
Critics argue that some benefits, such as personal use of corporate jets and company-paid home security systems, are unnecessary for executives who make enough to pay for a well-heeled lifestyle on their own. “I think that kind of stuff just draws the ire of investors and employees,” says Jack Dolmat-Connell, president of compensation and benefits consulting company DolmatConnell & Partners.
Goodman
Amy Goodman, partner at the law firm Gibson, Dunn & Crutcher, says another perk that investors are “particularly upset about” are tax grossups, where companies cover the taxes that the executives have to pay on perks.
Some of the benefits that companies offer are, however, justifiable, says Dolmat-Connell.
“When you look at things like financial and estate planning, for example, I think companies can get a big benefit out of paying this for their executives,” he says. The rationale is that executives are less inclined to ask for more, he contends, because their financial house is in order. If companies do not offer such a benefit, executive are more inclined to “want, want, want,” he says.
Perks Re-evaluated
Oringer
Because the new proxy disclosure rules shine a brighter light on executive compensation and the bases for those decisions, directors are “more circumspect about the grants and awards that they make,” says Andy Oringer, who specializes in executive compensation at the law firm Clifford Chance.
One particular topic of conversation raised at many board meetings recently is how these benefits appear to the average employee, says Dolmat-Connell, especially during a time when employee medical costs, for example, continue to increase at significant rates every year. “The average person is really feeling the pinch of some of these things,” he says. “Given that, should we be lavishing all of these [perks] on the executives?”
PERKS GIVEN
Below is a summary of some of the perks awarded to CEOs, from Compliance Week's sampling of 250 large companies.
Aircraft Usage
SERPs
Tax Planning
Club Dues
Total 'No'
59
74
80
135
Percent 'No'
23.6 %
29.6 %
32 %
54 %
Total 'Yes'
191
122
170
115
Percent 'Yes'
76.4 %
70.4 %
68 %
46 %
Compliance Week Research Dept. (July 3, 2007)
How the public at large scrutinizes these companies also plays a significant role in directors’ minds when it comes to re-evaluating perks. Dolmat-Connell says one question directors now ask themselves is, “‘How is this going to look when this is disclosed?’ That was definitely not part of the decision-making process historically.”
The textbook case of ire over executive perks occurred in 2002, when the perks granted to former General Electric CEO Jack Welch were disclosed in divorce papers served by his ex-wife. GE had promised Welch a free Manhattan apartment, courtside seats to professional basketball games, and restaurant bills expensed to the company—among many, many other items. Practically none of those details were disclosed by the company itself before Welch’s ex-wife did. Stung by the publicity, Welch eventually declined many of the perks.
Dolmat-Connell
Another question companies and boards are asking, too, is, “‘If this is going to be disclosed, do we have a really strong business rational for doing this? If not, we probably ought to eliminate it,’” Dolmat-Connell says.
Eliminating perks is exactly what some companies have resorted to, albeit minimally. Countrywide Financial, for example, said in its proxy that future use of the company-leased car would be offered only to those executive officers currently entitled to that benefit. In addition, the company said, the same will apply to the future purchase of country club memberships.
Ford Motor Co., too, announced that Executive Vice President Mark Fields would no longer use company aircraft for his personal trips home on weekends. In its proxy, Ford said that compensation for such trips totaled $517,560 in 2006.
But just because some companies eliminate perks, that doesn’t mean they don’t make up for it in other areas. In many cases, the company eliminates the perk but makes up for it in cash compensation, “so the ultimate compensation levels are relatively the same, but the unappealing need to list the specific perk is eliminated,” Oringer says.
Other companies, such as American Express, Colgate, and United Technologies, provide specific allowances instead of perks—a benefit that some call futile. “At that point, it seems to me, you might as well raise their salary,” Goodman says.
Changed Landscape
Just how many companies will change or reduce company perks remains to be seen as more years pass under the new proxy disclosure rules, but experts do predict a trend toward fewer of them. “I think there’s so much of an eye toward public disclosures these days … that we’re not going to see [perks] go up at all. In fact, I think they’re actually going to go down,” Dolmat-Connell predicts.
He also expects more companies to limit the perks they offer to business-related purposes only. Where benefits have historically been portrayed as status symbols, more companies will start offering benefits that are going to “improve the efficiency or the effectiveness of the CEO and the senior executives,” he says.
“I think the days of heaping stuff on without really thinking about the ramifications from a PR standpoint really are over,” says Dolmat-Connell.
A downloadable spreadsheet of perks at 250 of the S&P 500 can be found in the box above, right, and Compliance Week will continue its series on perks next week.
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