From exclusive “executive physicals” and club memberships to tax planning, home security systems, and car services, few limits exist when it comes to executive perks.
While company aircraft use and Supplemental Executive Retirement Plans top the charts as the two most popular benefits among 250 large companies analyzed by Compliance Week, other favorites offered by the majority of companies include tax planning (68 percent), auto allowances (64 percent), and other plums further behind.
Dow Chemical, for example, paid $82,430 in financial planning support for its executives last year; nearly half went to Chief Executive Officer Andrew Liveris, at a total of $39,445. In its proxy, Dow says each executive is allocated $5,000 for financial planning, or 3 percent of annual salary, whichever is greater.
Several other companies doled out thousands of dollars in auto allowances alone. Black & Decker paid $68,553 last year in car and driver expenses for CEO Nolan Archibald. Johnson & Johnson spent $35,304 on a car and driver for CEO W.C Weldon’s personal transportation. Similarly, managed care company Coventry Health Care spent $20,655 in auto lease expenses for chairman and former chief executive Allen Wise.
Other companies supply their executives spending money in the form of cash allowances. Honeywell, for example, gives $50,000 to each of its highest paid executives to spend on items “including, but not limited to, tax and financial planning, car leases, and executive life insurance,” according to its proxy.
Less popular, but costing a pretty penny nonetheless, are club memberships and home security monitoring systems, offered by 46 percent and 37 percent of companies, respectively. Johnson & Johnson spent a total of $300,525 in perquisites last year for its executives, which comprised home security system monitoring fees, executive dining room meals, financial planning, and medical examinations, its proxy states.
‘Executive Physicals’
Medical examinations for executives, like the one offered by Johnson & Johnson, typically are not your average check-up. Of the 48.8 percent of companies that offer supplemental health care, most offer the “executive physical,” which retains its name mainly because only corporate executives and other affluent individuals can afford it.
Oringer
The private medical centers that provide such physicals generally are “very patient orientated,” says Andy Oringer, who specializes in executive compensation at the law firm Clifford Chance. “The services are of a very high quality.”
The typical executive physical begins with the doctor performing a detailed medical history and a thorough hands-on examination. Other standard tests include a chest X-ray, hearing and vision testing, lung function, electrocardiogram, urinalysis, and nutritional and lifestyle consultations. “The physicals that I personally go to last hours,” says Oringer.
Quality care does not come cheap. Lowe’s, for example, spent anywhere from $1,515 to $4,998 per executive in physicals last year. Other companies include WellPoint, which spent $1,350 to $4,834, and Marathon Oil, which spent up to $3,546, on executive physicals last year.
But in light of the new SEC disclosure rules coupled with the rising costs of health insurance premiums, deductibles, and copays for rank-and-file workers, companies are finding it more and more difficult to justify executive physicals as a perk.
Dolmat-Connell
“Medical costs and sharing go up pretty significantly every year. The average person is really feeling the pinch of some of these things,” says Jack Dolmat-Connell, of compensation consulting firm DolmatConnell & Partners. Given that, he says, many companies are asking whether they should be “lavishing all of these things on the executives.”
Fading Perks
Fading under the glaring light of disclosure are several executives’ perks. Aerospace giant Lockheed Martin Corp., for example, said in its proxy that, as of January 2007, executives are no longer paid or reimbursed for annual country club memberships, financial counseling and tax preparation, or ground-transportation services and event tickets for personal use.
To make up for the lost perks, however, Lockheed approved one-time salary adjustments ranging from $25,000 to $40,000 per executive. The company also did not eliminate all perks, keeping relocation assistance and executive physicals.
Likewise, electronics distributor Arrow Electronics stopped reimbursing chief executive William Mitchell for perks such as club dues, car expenses, tax preparation, and financial planning but boosted his salary by $100,000. Other companies that phased out several similar perks include Exelon Corp. and Sunoco.
In its proxy, Sunoco added that while executives do still receive company-provided home security monitoring and company-provided parking spaces, CEO John Drosdick pays for the full value of the benefits, while the other executives pay their applicable taxes.
Other companies offer limited benefits. “Consistent with our philosophy of making compensation primarily performance based, executive perquisites are limited to a company car and annual physical,” PepsiCo’s proxy states. “Executive officers do not receive other perquisites such as country clubs, financial planning, or company-paid apartments.”
Most notable, however, are those companies that have never provided executive perks—not even reserved parking—such as search engine giant Yahoo! and Warren Buffett’s holding company, Berkshire Hathaway.
“Berkshires’ program rewarding compensation of its executive officers is different from most public company programs,” the company’s proxy states. Both Buffett and Vice Chairman Charles Munger have not only received an annual salary of $100,000 for the past 25 years with no intention or desire to increase their salaries in the future, but also neither use company cars or belong to clubs to which the company pays dues, Berkshire’s proxy states.
The proxy also notes that both Buffett and Munger reimburse the company for the cost of even minor items, such as postage or personal phone calls, “by making an annual payment to Berkshire in an amount that is equal to or greater than the costs that Berkshire has incurred on their behalf.”
Furthermore, the compensation committee has an established policy that “neither the profitability of Berkshire Hathaway nor the market value of its stock are to be considered in the compensation of any executive officer,” and that Berkshire does not grant stock options to executive officers. Buffet’s total annual compensation in 2006 was $214,250, including all other compensation, while Munger’s total has consistently been $100,000 dating back to 2004 reports.
SEC Criticism
Regardless of how a company doles out its profits, critics contend that the new SEC disclosure rules distort executive compensation, because the total compensation figure, particularly, is not an accurate picture of an executive’s paycheck.
Uyl
“One of the things that consultants and companies have to start doing is they need to have a method for valuing these plans compared to other forms of pay, because when you look at SEC disclosure, that’s one method of valuing these plans. It’s a point in time,” says Janet Den Uyl, an executive-benefits specialist at Mercer Human Resources Consulting. “It’s very misleading what those numbers in the … summary comp table are saying.”
Many times, the total includes untouched pension earnings, as well as stock options that weren’t necessarily cashed out. Uyl gives the example that someone new to a plan may not have even invested anything, but “past service is going to show up in that first year.”
One particular example is Constellation Energy, which reported a $20 million total compensation figure last year for President and CEO Mayo Shattuck in its proxy. That total, however, included stock options that were granted in previous years. In a footnote, the company said that the 2006 total is actually $14 million. Therefore, Uyl says, companies should really be looking at their total compensation structure. “You can’t just look at it in one point in time,” she says.
Oringer adds that it may be that the SEC disclosure rules have gone too far. “And if, in fact, the rules have gone too far, then one would hope that the SEC would continue to … make appropriate adjustments,” he says.
A downloadable spreadsheet of perks at 250 of the S&P500 can be found in the box above, right. Also available are previous entries in this Compliance Week series on executive perks.
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