A study by compensation researcher Equilar indicates that the SEC's new rules on disclosure may be affecting the value of executives' benefits
The fear of shame remains a remarkable motivator.
When the Securities & Exchange Commission declared that companies would be required to disclose every executive perk costing the company $10,000 or more, some scoffed that the ruling would have little impact. But the SEC's rules took effect at the start of 2007, and the early signs are intriguing: Corporate spending on several favorite perks has declined, and the combined value of the assorted extras lumped into the category of "other compensation" has edged lower, according to a new study shared exclusively with BusinessWeek.
The median value of benefits and perks received by chief executive officers at nearly 100 of the nation's largest companies fell 1.3% in 2006, to $334,433, according to the analysis by Equilar, a Redwood Shores (Calif.) research firm. And the median declined in three of the five perk categories Equilar studied. (There's a one-year lag in compensation disclosures, so this year's proxy filings quantified the perks received in 2006, and last year's proxies detailed those received in 2005.)
Equilar is quick to point out that the drop in certain perks is driven in part by the new rule itself rather than any resulting change in behavior: Because the old rules only forced disclosures of individual perks worth $50,000 and up, the non-itemized ones below that threshold couldn't be calculated into the averages for past years. The sudden disclosure of so many items worth less than $50,000 would naturally exert a downward pull on the averages. Still, Equilar also gives partial credit for the declines to "perk paranoia" brought on by the new rules, with companies opting to nix certain extras rather than deal with bad publicity.
A New Tax Bite
Not surprisingly, more companies were forced into the perk confessional. In five different categories—personal aircraft use, flexible perk accounts, security, tax reimbursements, and financial planning—the number of companies disclosing an expense was greater than in 2005. That helps to paint a "more complete picture" of executive perks, says Equilar's research manager, Alexander Cwirko-Godycki. "There's definitely a sense that companies are trying to provide more detail, rather than leaving people to assume what [executives] might be getting," he says.
In terms of specific fringe benefits, the biggest decline came in what some consider the most perverse perk of all—the reimbursements companies give top executives for the personal income taxes they owe on their other perks. Last year, the median value of these reimbursements, or "gross-ups," fell more than 40%, to $23,951, compared with 2005 levels.
However, as Equilar looked at only about 100 of the biggest companies, the data excluded one of the most extravagant gross-ups of all time. Of the $135 million golden parachute given to former North Fork Bancorp CEO John Kanas when he sold the bank to Capital One Financial (COF) last year, nearly a third went to cover his tax bill on the severance package (BusinessWeek, 03/22/07).
Leaving on a Jet Plane
Parting with perks may be a sad reality for executives, but departing in style is another matter. That most beloved of indulgences—and by far the most expensive perk—personal use of the corporate jet, rose last year despite the new disclosure rules, albeit at a slower pace than in 2005. In 2006, the median value of non-business travel on corporate aircraft rose 12.1%, to $121,676. Equilar's Cwirko-Godycki notes that aircraft use is one perk where outside factors such as rising fuel costs have made it more difficult to curb spending.
In a separate study of 215 public companies by the Portland (Me.) advocate The Corporate Library, CompuCredit (CCRT) CEO David Hanna was found to have run up a higher tab using the corporate jet for non-business travel than any other CEO in 2006. He was the only one to exceed $1 million. Michael McGrath of a former Internet highflier named i2 Technologies (ITWO) was a close second for the frequent flyer award, followed by EchoStar Communications' (DISH) Charles Ergen, and Abercrombie & Fitch's (ANF) Michael Jeffries.
One other category studied by Equilar—free financial planning—also bucked the trend. The median value here rose 16%, to $17,156, last year. Thanks to the reduced reporting threshold, the number of companies quantifying this perk surged to nearly three-fourths of the companies studied, up from just 30% in 2005.
Although it's easy to poke fun at the notion of a savvy executive requiring financial guidance, personal wealth management is complex business. It can be puzzling, though, why wealthy individuals shouldn't cover these personal expenses on their own. All of which makes Lloyd Blankfein a double mystery. CEO of investment bank Goldman Sachs (GS), Blankfein is one of the nation's highest-paid executives—he earned $44 million in 2006 along, including
a $27.2 million cash bonus—yet he took $63,000 worth of free financial
counseling from his employer.
Beating the Game with Higher Salaries
Perhaps looking to avert investor outrage, many companies have already pulled the plug on some of their more conspicuous perks. Of the companies surveyed by Equilar, more than 16% indicated they had eliminated some or all of their executive perks by the start of 2007. Exxon Mobil (XOM), for example, has done away with country club memberships on the corporate tab, and UnitedHealth (UNH) is halting personal use of corporate aircraft.
Meanwhile, some companies are simply shifting perk expenditures to a different compensation column. Metals producer Alcoa (AA) has upped the salary of its executive officers by $6,500, it says in its proxy, "in lieu of" reimbursements for club dues and financial planning.
Although Equilar's study finds that a slight decline in perk spending is under way, next year's proxy disclosures on 2007's expenditures may provide a clearer picture of whether the SEC's new disclosure rules will have a lasting, substantial impact. "Now that companies have outed these perks, does that mean that they're going to dial back from them?" asks Michele Leder, author of Financial Fine Print: Uncovering a Company's True Value (Wiley, 2003) and founder of footnoted.org (link= www.footnoted.org), a blog that combs corporate disclosures for juicy tidbits. "It could easily go either way."
In the end, she says, it'll be a question of how much companies are willing to bare, and how much shareholders are willing to bear.
Join a debate about CEO severance pay.