Recently, we analyzed the prevalence of executive perquisites and benefits for a client and dusted off a 2005 Clark survey of Fortune-1000 sized companies. The survey showed a significant prevalence (30% and above) for perquisites such as personal use of company planes, auto allowances, country clubs and financial planning services. Our assumption was that there has been a significant diminution in the prevalence of these perquisites since 2005 due to changes in SEC disclosure requirements and increasing public and shareholder skepticism about all things executive pay. Somewhat surprisingly, however, based on our own survey of recent corporate proxies, executive perquisites are alive and well. The resilience of perquisites highlights their potential business value.
In 2006, the SEC finalized new rules that required enhanced disclosure of perquisites in proxies. If the total value of perquisites is greater than $10,000 than the total value must be disclosed and each individual perquisite identified. Further, if the cost of any individual perquisite exceeds the lesser of $25,000 or 10% of the total, its cost must be identified. Prior to this rule, the value of perquisites only needed to be disclosed if they exceeded the lesser of $50,000 or 10% of compensation. Individual perquisites only needed to be identified if they exceeded $25,000.
Following the more stringent SEC rules, we have had a deep recession and public and congressional distress over large bonuses paid to executives preceding bankruptcies and/or government bailouts of their companies. Our assumption was that company spending on executive perquisites would drop like the 2008 Dow Jones.
When we conducted our own analysis of recent (2008 fiscal year) proxies among Fortune 1000 sized companies, however, we still found a significant use of executive perquisites - down in some areas and up in others. For example:
- The 2005 survey showed 47% of companies provided an executive car allowance or leased car; our survey shows 44%.
- The 2005 Survey showed 30% of companies allowed for personal use of corporate aircraft; our recent survey showed 40%.
- A financial and/or tax planning benefit was provided by 66% of companies in 2005; our survey showed 38%.
- An annual executive physical was provided by 11% of companies in 2005 and 18% today.
- Country club memberships - 36% in 2005; 22% today.
All this disclosure and sensitivity to shareholder reaction, raises the question: why go to all this trouble for perquisites that might add up to $20,000 or maybe $100,000 including personal use of corporate aircraft? The cost is not peanuts but is not particularly significant for executives making in low seven figures. Why not just pay them an extra $20,000 or $100,000 and be done with it? In fact, a small percentage of companies do just that - they provide an executive perquisite fund equal to a dollar amount for executives to spend on what they wish.
Why the resiliency of perquisites? In large part, because they are a very cost-effective form of compensation. They satisfy the urge in all of us, including highly paid executives, to feel special. Like a corner office or reserved parking space, having a company car, access to the corporate jet and membership in a country club are highly visible signs of success. We might not be able to go around boasting about our large paycheck, but we can proudly drive a company car or take our family on the jet. Perquisites can make an executive feel good in ways that dollars cannot.
Consider the most criticized prerequisite of all: personal use of the corporate jet. Executives use the jet to take their spouse on business trips or occasionally on vacation. While much ridiculed, the incremental cost of this benefit is often zero or trivial compared to the cost of owning and operating a jet. From a purely cost/benefit perspective, why not let the executive occasionally use it?
No doubt, there is also a bit of executive competition at work. Some executives feel that if they do not get perquisites at least as good as the other guy the Board does not appreciate them sufficiently. In fact, private companies are much less likely to provide executive perquisites than publicly traded companies.
Perquisites are still common and there is a good business rationale for them. A good business-focused perquisite program will look less to what other companies are doing and more around identifying perquisites that are worth more to executives than the cash itself.
