While many corporate officers continue to enjoy healthy compensation packages, the number and value of perquisites—including access to the corporate jet, payment of club dues, and no-interest loans—has dropped over the past few years.
When benefits consulting firm Towers Watson compared the perks offered in 2013 to those in 2008 at about two-thirds of the Fortune 500 companies, they found the number of companies offering more than three perks plummeted by nearly half, falling from 60 to 33 percent.
The hardest-hit perks? Supplemental life insurance, payment of social and country club dues, and personal use of the corporate aircraft. For example, the percentage of C-suite executives with access to their companies' aircraft dropped from 53 percent to 36 percent over the last five years, while the percentage of companies covering executives' premiums for supplemental life insurance declined from half to just a quarter during that time.
“We have seen a sea change in the approach to executive perks over the last five years,” says Carol Bowie, head of research for the Americas with research firm ISS Governance.
True, a few perks grew more popular during the last five years, while companies ended the use of those others. Reimbursement for executive physicals, for example, jumped from 22 to 32 percent. The physicals, although not related directly to companies' performance, can help ensure that executives are able to do the jobs for which they're hired, says Doug Friske, managing director with Towers Watson.
Several shifts in the broader economic and regulatory environment have converged to drive these shifts. In late 2006, the Securities and Exchange Commission issued rules regarding public companies' disclosure of their executive compensation packages. Among other provisions, these “require the disclosure of perquisites and other personal benefits unless the aggregate amount of such compensation is less than $10,000.” Before this, disclosure typically wasn't required until the value of perks hit $50,000.
In the rules, the SEC also laid out just what constitutes a perk: “An item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”
A company's provision of helicopter service for a CEO to commute to work, for example, is a perk because, the SEC notes, it “is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis.”
In light of these rules, “companies really had to enumerate in some detail the various perks and their value,” Bowie says. That generated some criticism from investors, particularly when the values started topping six figures, she adds.
The increased scrutiny from governance firms like ISS and Glass Lewis also has had an effect on the level of perks awarded to senior execs, says Deborah Lifshey, managing director with compensation consultants Pearl Meyer & Partners. “They've said that excess perks will result in a ‘no' recommendation,” to shareholders casting “say-on-pay” votes regarding executive compensation, Lifshey says. “It's been a really strong influence.”
Ending the Entitlement Mentality
While many shareholders recognize that most perks aren't large enough to directly affect earnings in a material way, they also see them having a negative effect on companies' performance in other ways. For starters, “they contribute to a culture of the imperial CEO and entitlement for top execs,” Bowie says.
“The thinking is that if we're paying an executive this much and enabling him or her to acquire wealth by helping the company do well, at some point, they ought to be on their own for some of this.”
—Dave Hofrichter,
Principal & Leader,
Aon Hewitt
That can have a more pronounced impact on earnings if it dampens employee morale, Bowie adds. Additionally, some argue that an entitlement mentality can lead to executive actions that do affect earnings, such as the expectation of a bonus, even if the executive didn't meet the established criteria. Bowie says that while no link between excessive perks and such behavior has been established, the increased disclosure prompted questions about any connections.
Several high-profile cases of wildly excessive perks about a decade ago also led many firms and shareholders to question their role within executives' compensation packages. A case in point: the use of low- or no-interest corporate loans by Dennis Koslowski and several other Tyco executives for their own benefit. The loan program was intended to help executives purchase Tyco stock, the SEC said when it filed suit against the executives in 2002. Instead, Koslowski spent $242 million in loan money “for personal expenses, including yachts, fine art, estate jewelry, luxury apartments and vacation estates, personal business ventures, and investments, all unrelated to Tyco.”
A more recent example is that of Chesapeake Energy CEO Aubrey McClendon, who was forced out of the company this year after his lavish company perks came to light, including generous personal use of a fleet of corporate aircraft, personal loans, and a personal interest in several wells that Chesapeake drilled. As part of his severance agreement, he not only got $35 million, he also gets free access to a company jet until 2016.
Pay for Performance
Another factor behind the drop in perks' popularity has been the move by many companies to more directly connect execs' pay to the firm's performance. “Perks, by definition, are not performance-based,” Bowie says.
One justification for perks has been the idea that they make an executive's life easier, allowing him or her to concentrate on the job at hand. Most shareholders accept this only to a point, says Dave Hofrichter, principal and leader of Aon Hewitt's executive compensation and governance practice. The thinking is that, “if we're paying an executive this much and enabling him or her to acquire wealth by helping the company do well, at some point, they ought to be on their own for some of this.”
S&P 500 PERKS
The following chart from Ayco shows the most common executive perquisites provided to the CEO and named executive officers for S&P 500 companies, as indicated in the company's most recent proxy statement.
Source: Ayco.
Given the increasing scrutiny of perks and the backlash against what some view as excessive levels, a growing number of companies have done away with them. The percentage of companies offering no executive perks more than doubled between 2008 and 2013, rising from 6 to 15 percent, Towers Watson found.
At the same time, more companies simply are providing a “perk allocation” of, say, $30,000. Currently, about 6 percent of S&P 500 companies provide a fixed dollar figure and let executives choose their own allotment, according to Ayco Co., a provider of financial counseling to corporate executives. This move may help companies avoid any criticism that specific perks may spark. In addition, it can simplify the compensation function, allowing companies to remove themselves from the travel or country club business, Hofrichter notes.
As companies have become more discriminating in the perks they provide, more
executives have come to realize that it doesn't make sense to argue for them, Lifshey says, although they may ask for a larger overall compensation package. “It's a matter of optics,” she says. That is, highly paid executives also receiving additional benefits can seem over-the-top to other employees and investors.
Still, the focus on perks distracts from more serious concerns with executive compensation, says Kevin Murphy, finance chair at the University of Southern California's Marshall School of Business, who's researched executive compensation.
Not only are perks a small component of most executive pay packages, but many shareholders are more concerned that executives are being paid in a way “that motivates them to increase shareholder value,” he says. The absolute level of pay often is less of a concern.
Given this emphasis, the general thinking behind the role of perks has changed from “what's the list of perks we can have?” to “what's the value?” Hofrichter says.
Compensation committee members deciding whether to offer a perk to an executive, need to first ask themselves three questions, Hofrichter says: “Why are we doing this? What are we getting for it? How does it benefit shareholders?”
It no longer is sufficient to rationalize a perk by pointing to other companies that are offering them or saying that it will result in a happy executive. The company has to receive a tangible benefit by providing the perk, Friske says. “Have a thoughtful, reasoned explanation for why these programs exist.”
No comments yet