Perks have blossomed as a form of executive compensation for years. Under the new rules for disclosing executive compensation, however, expect to see companies start pruning away excessive growth in the field.

The extent to which companies change or reduce how they give perks, or amend perquisite policies, won’t be fully known until 2007 proxy statements are filed next spring. But experts tell Compliance Week that the Securities and Exchange Commission’s new compensation-disclosure rules are prodding compensation committees to take a hard look at those little details that can spawn such formidable investor displeasure.

“Clearly, rethinking their perks is now an item on lot of companies’ agendas,” says Bill Gerek, a director in the executive compensation practice at the Hay Group, a consulting firm. “Even at companies with large perks—which isn’t many—they’re a minor portion of executive pay. But [to investors] they’re often seen as red flags and may cause inordinate amount of grief for companies compared to what they cost.”

Previously, companies only had to disclose perks for a named executive officer if the aggregate amount of those benefits exceeded 10 percent of the executive’s total annual salary and bonus, or $50,000; under the new rules, disclosure is required if the aggregate amount of perks equals $10,000 or more. The new rules also require that all perks be identified if their aggregate value passes that $10,000 threshold, where previously companies only had to identify individual perks if their value exceeded 25 percent of the total. Directors’ perks also must be disclosed.

“It’s not surprising that a lot of people are looking at perks right now,” says Paula Todd, managing principal at compensation-consulting firm Towers Perrin. “Any time the rules change, it will always prompt people to rethink things en masse.”

Gerek says most companies are busy right now simply determining what perks they give and why they are giving them. Once that chore is done, “compensation committees will think about what they really want to provide. We’ll see a lot of companies making changes between now and the middle of next year.”

Goodman

Amy Goodman, a partner at the law firm Gibson, Dunn & Crutcher, agrees that companies are “looking harder at perks” since they are what engenders comments from investors and publicity in the media. For example, she says, “some companies may reconsider whether they should pay for an executive who makes $1 million in salary plus a bonus to consult with an adviser on personal financial matters.”

Companies also may consider arranging for executives to get a certain personal benefit but having the executives pay for it, or paying additional salary and letting the executives pay for the benefit themselves.

Alternatives To Perks

While some companies have proposed determining the value of the perks they award and giving executives that money in base pay, compensation experts warn that companies should consider that option carefully, since doing so can affect bonus pay, life insurance, and severance benefits, among other things.

Deborah Lifshey, a vice president at compensation consulting firm Pearl Meyer & Partners, also warns that giving money instead of perks “can hide something ugly and end up with something uglier,” because suspicious critics will wonder what perks a company would rather pay for in cash instead of disclosing.

PERK PASSAGE

Below is an excerpt from the SEC's compensation disclosure rule, detailing what should be disclosed about perks.

Perquisites and other personal benefits are included in the All Other Compensation column. As we proposed, we are adopting changes to the disclosure of perquisites and other personal benefits to improve disclosure and facilitate computing a total amount of compensation. Our amendments require the disclosure of perquisites and other personal benefits unless the aggregate amount of such compensation is less than $10,000 … While we realize that this threshold may result in the total amount of compensation reportable in the Summary Compensation Table being slightly less than a complete total amount of compensation, we believe $10,000 is a reasonable balance between investors’ need for disclosure of total compensation and the burden on a company to track every benefit, no matter how small. Prior to today’s amendments, the rule permitted omission of perquisites and other personal benefits if the aggregate amount of such compensation was the lesser of either $50,000 or 10% of the total of annual salary and bonus, allowing omission of too much information that investors may consider material.

The amendments we adopt today require, as proposed, footnote disclosure that identifies perquisites and other personal benefits. Prior to these amendments, the rule required identification and quantification only of perquisites and other personal benefits that were 25% of the total amount for each named executive officer. We have modified this requirement so that, unless the aggregate value of perquisites and personal benefits is less than $10,000, any perquisite or other personal benefit must be identified and, if it is valued at the greater of $25,000 or ten percent of total perquisites and other personal benefits, its value must be disclosed. Consistent with our objective to streamline the Summary Compensation Table, the revised threshold is intended to avoid requiring separate quantification of perquisites having de minimis value. Where perquisites are subject to identification, they must be described in a manner that identifies the particular nature of the benefit received. For example, it is not sufficient to characterize generally as “travel and entertainment” different company-financed benefits, such as clothing, jewelry, artwork, theater tickets and housekeeping services …

Among the factors to be considered in determining whether an item is a perquisite or other personal benefit are the following: An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties; otherwise, 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. We believe the way to approach this is by initially evaluating the first prong of the analysis. If an item is integrally and directly related to the performance of the executive’s duties, that is the end of the analysis – the item is not a perquisite or personal benefit and no compensation disclosure is required. Moreover, if an item is integrally and directly related to the performance of an executive’s duties under this analysis, there is no requirement to disclose any incremental cost over a less expensive alternative. For example, with respect to business travel, it is not necessary to disclose the cost differential between renting a mid-sized car over a compact car.

Because of the integral and direct connection to job performance, the elements of the second part of the analysis (e.g., whether there is also a personal benefit or whether the item is generally available to other employees) are irrelevant. An example of such an item could be a “Blackberry”or a laptop computer if the company believes it is an integral part of the executive’s duties to be accessible by e-mail to the executive’s colleagues and clients when out of the office. Just as these devices represent advances over earlier technology (such as voicemail), we expect that as new technology facilitates the extent to which work is conducted outside the office, additional devices may be developed that will fall into this category.

Source

Final Rule On Executive Compensation And Related-Person Disclosures (Securities And Exchange Commission; Nov. 7, 2006)

Gerek, too, says he’s seen a number of companies propose that approach. “For most, that winds up being a simplistic approach that gets quickly rejected once it’s thought through,” he says.

Other options include capping the dollar amount for perks, having executives pay a portion of the cost of their perks, eliminating certain high-priced perks, or allotting a flat dollar amount to executives and letting them select their perks from a menu of choices. Experts say some companies are likely to switch to such a flexible, “allowance” program to avoid what Lifshey calls “ugly disclosure.”

“Companies are getting nervous now that there’s a higher degree of specificity reported and a lower threshold for reporting,” she says. “The optics aren’t good.”

Lifshey

Lifshey notes that some companies, such as Intel, Microsoft, Cisco, and El Paso have “eliminated the frills,” and either don’t have perks or don’t give their executives exclusive benefits. Others, such as American Express, Colgate, and United Technologies, provide specific allowances instead of perks (For links to those companies’ 2006 proxy statements, see the Related Resources box, above right).

Todd says a flexible perks program is a good option for some companies, but cautions that administrative and design hurdles can be challenging. For a flexible program to work, she says, it needs “a number of different choices with similar or compatible price-points, so the it’s actually possible to trade off one for another.”

She also says companies may not want to give executives “free latitude” in what they choose, since certain perks benefit the company as well as the participant. For example, club memberships may lead to business contacts, security-oriented perquisites may protect valuable company “assets,” and labor-saving perks such as tax preparation or financial planning may allow executives to spend more time on business.

The bottom line: perk programs can be established in many ways, and the approach will depend on the company.

“What’s viewed as unnecessary at one company might not be at another,” Gerek says. For example, while executives’ personal use of company aircraft has come under fire in the press, “There are cases where it’s viewed as very valuable.”

Tighter Policies? Maybe Not

One company, Molex, a $2.8 billion maker of plugs and electrical connectors, disclosed in its proxy statement filed Sept. 13 that its compensation committee has even adopted a “perquisite pre-approval policy.” Now, certain perks and maximum amounts for them must be pre-approved by the committee. The committee also must separately approve any perks not specifically included in the policy or that exceed the maximum amounts in the policy.

Todd

While Todd says Molex’s disclosure “has been getting a fair amount of attention because it suggests that very tight controls are being imposed,” she and others say that approach isn’t widespread. Molex did not respond to a request for comment.

Goodman, who says she hasn’t seen other companies making that type of disclosure, says the idea may be unnecessary, since by definition compensation committees are supposed to review all parts of executive compensation, perks included.

“I’m sure [Molex] chose their words about pre-approval to show that the comp committee is driving the ship,” Todd says. “I think more companies will try to convey that message and they may devote more attention to making sure their policies are clear.”

Without more detail about what the company is doing, “It’s hard to tell whether it’s more for effect than reality,” she continues. “I certainly hope we’re not moving toward a world where boards have to pre-approve every expenditure that a company makes, since that’s inherently at odds with their governance-policy-setting role.”

Perks do carry emotional baggage for shareholders. “Investors don’t worry about every $10,000 a company spends in general, but they worry about perks as low as that amount,” says Todd.

Still, Gerek and others were quick to point out that, “Most companies have other more important things in their compensation structure to deal with.”