A Closer Look at "Perks"
Submitted by: L. Reed Walton, Staff Writer
This year, as U.S. companies file proxy statements under the new compensation disclosure rules, the perquisites and other extra benefits that top executives enjoy are becoming more apparent to investors.
Before this proxy season, many executive perks were largely obscured, with a few coming to light years later during litigation or government probes. Prominent examples include the $15,000 umbrella stand and other luxury items purchased by Tyco International CEO L. Dennis Kozlowski, the personal aircraft use by former Tyson Foods Chairman Donald J. Tyson and his family, and the retirement perks received by General Electric CEO Jack Welch, which included use of an $11 million Manhattan apartment and a Mercedes. These headline-grabbing benefits helped spur investor demands for better disclosure of perks and other forms of executive compensation.
The new Securities and Exchange Commission rules mandate that companies disclose perks in aggregate of $10,000 (down from the former limit of $50,000) in the summary compensation table. The rules are causing some firms to cut back on perks, while other companies seek to defend these extra benefits by citing retention and security concerns.
Some investor advocates are not persuaded by corporate arguments that perks are still needed to retain top executives.
"Pay should be tied to long-term sustainable corporate performance, so perks can break this pay-for-performance link," Justin Levis, a senior analyst with the Council of Institutional Investors (CII), told Governance Weekly.
Levis said he "has yet to hear a convincing rationale" from companies about why they provide free personal travel on the corporate plane, club dues, home security, and other "extras."
Perks reform, said Michael Garland, director of value strategies for the CtW Investment Group, the investment arm of labor federation Change to Win, is "obviously a reform that the labor funds are highly supportive of."
"In situations where there are egregious perks," Garland told Governance Weekly, "you will see shareholders develop either ... proposals or [requests for] greater accountability of board members."
As companies file their first proxy statements under the new disclosure rules, it's not yet clear whether a significant number of firms are scaling back the perks, supplemental retirement plans, and other benefits that are not provided to regular employees. However, anecdotal evidence suggests that many firms still offer these benefits, and they now are making a greater effort to explain these practices to shareholders.
For instance, Boeing's proxy statement provides a breakdown of CEO James McNerney Jr.'s personal use of the corporate jet, which the company valued at $331,649. That total includes $63,053 for personal travel associated with relocation, $268,396 for general personal travel, and $9,160 for travel to outside board meetings. McNerney serves on two boards aside from Boeing's.
Drugmaker Eli Lilly's proxy specifies that CEO Sidney Taurel only used the company jet for personal travel to and from outside board meetings. "The company does not provide significant perquisites or personal benefits to executive officers, except that the company aircraft is made available for the personal use of Mr. Taurel and [Chief Operating Officer John] Lechleiter, where the committee believes the security and efficiency benefits to the company clearly outweigh the expense," the proxy statement reads.
While Goodyear Tire & Rubber offers top executives home security services, financial planning, tax preparation, country club dues, and annual physical exams, the company's proxy statement said the compensation committee "does not consider these perquisites to be a significant component of executive compensation."
Retention and security are the most-often cited reasons for executive officer perquisites. Morgan Stanley and eBay say in their proxy statements that perquisites (and other benefits such as bonuses and equity awards) are essential to retaining the same quality of executives that lead other firms in their revenue and industry grouping. The companies provide bulleted lists of peer companies with which they must "compete" for top executive talent.
Margaret Whitman, CEO of online auction firm eBay, received more than $1 million in personal travel on the company plane, including nearly $240,000 in reimbursements for taxes (also known as "gross-ups") owed on that travel. The company also notes that it paid finance chief Robert Swan close to $1 million in relocation fees and related tax gross-ups for "costs and expenses related to moving from Texas to the San Francisco Bay Area and the sale of his home." EBay also offers information technology support for executives' home computer systems.
Southern Union's proxy statement notes that it has a "policy that encourages [CEO George] Lindemann and his spouse to use company aircraft for all business and non-business purposes for their personal security and safety." The Houston-based natural gas company reports that Lindemann accrued $609,862 in personal travel on the company jet in 2006, not including $44,393 in tax gross-ups.
United Technologies reported $612,303 in personal airplane use by CEO George David in 2006. Like Southern Union, the United Technologies proxy statement says that the CEO and CFO "use corporate aircraft for personal travel in accordance" with the company's security policy, but no further explanation of the security policy is provided.
Meanwhile, Morgan Stanley CEO John J. Mack incurred $321,848 for personal aircraft use in fiscal 2006 and $407,762 in fiscal 2005, according to a footnote to the company's summary compensation table. At Morgan Stanley, a "board-approved policy directs the Chairman and CEO to use the [c]ompany aircraft when traveling by air."
Reduction in Perks
Though many companies are retaining perks, some firms have scaled back these benefits in anticipation of closer scrutiny by investors this year. According to The Wall Street Journal, a November report by Mercer Human Resources indicated that 14 of 110 companies surveyed had decided to drop certain perquisites or were considering doing so because of the new SEC disclosure regulations.
Embarq, a telecommunications company, eliminated a number of perks after a spinoff from Sprint Nextel. CEO Daniel R. Hesse now must reimburse the incremental costs of travel on the company plane--except for travel to outside board meetings, about which the firm says it "believes [Hesse's] ability to conduct company business during travel to these meetings is beneficial to the company," Embarq said in its proxy statement.
"We believe executive perquisites should be limited because the overall structure of our compensation and benefit programs should be broadly similar across the organization," the Embarq proxy statement reads, adding that the firm believes the cash and equity compensation it offers are more than adequate to attract skilled executives.
At Sunoco, CEO John G. Drosdick has asked the company to stop paying tax gross-ups on personal travel when using the corporate jet, according to the oil company's proxy statement. Drosdick also has given up his company-leased car, country club dues, and financial planning service allowances formerly provided by the firm, Sunoco said.
Telecommunications company Avaya also has stopped paying the gross-ups on personal travel, though it still offers top executives financial counseling, home security monitoring, annual physical exams, and vehicle allowances.
Fortune Brands eliminated automobile allowance, club dues, and financial planning services as perquisites, though certain officers still retain limited use of the company aircraft, according to the proxy statement. A footnote to Fortune's summary compensation table specifies that the only officers allowed limited use of the company plane--CEO Norman H. Wesley and CFO Craig Omtvedt--must reimburse the company for any personal travel on a company-owned plane.
Other companies, such as Lockheed Martin, Ryder System, and Xcel Energy, eliminated specific perks altogether and substituted a cash allowance to be spent as executives choose. Lockheed CEO Robert Stevens and Xcel CEO Robert C. Kelly each will receive $30,000 annually.
At United Technologies, the highest-paid executives receive a perquisite allowance in addition to personal use of the company jet. According to the proxy, the amount of the allowance is 8 percent of salary, which can be put toward a company-leased car or "otherwise paid in cash." The company states that "a cash perquisite allowance provides transparency and simplicity."
Supplemental Retirement Plans
Many companies offer their executives special retirement plans or pensions that go far beyond the benefits received by regular employees. These arrangements, called Supplemental Executive Retirement Plans, or SERPs, can deliver high-dollar values because many of them figure in bonuses and other incentive payments when calculating how much an executive can receive.
SERPs aren't considered "perks" per se, but they can be a significant part of the compensation packages received by senior executives. Shareholders have expressed concern that some executives are getting paid multiple times for the same performance if variable pay is included in SERP calculations. Investors filed about 20 proposals this season that ask companies to limit SERPs or exclude bonus payments from future benefit calculations. So far, those resolutions have averaged about 33 percent support, including a proposal by the United Brotherhood of Carpenters and Joiners of America that received a 51.6 percent vote at Goodyear in April.
At Black & Decker, CEO Noland Archibald has an accumulated pension value of over $36 million from his SERP and other retirement plans. Those benefits dwarf the $581,325 he is to receive from the company's standard pension plan, according to the hardware maker's proxy statement.
AT&T defends CEO Edward E. Whitacre's $84.5 million in accumulated pension benefits by citing his work in "reshaping the company and transforming it into a market-leading global competitor." Whitacre's former firm, SBC Communications, acquired AT&T in 2005 and took its name.
The communications firm stated in its proxy that it would subject all severance agreements that exceed 2.99 times a senior executive's salary and bonus to a shareholder vote, but AT&T did not specifically reference agreements on any other compensation.
High SERP and other supplemental plan values (some companies have additional supplemental plans for top executives) have cropped up for chief executives at other large firms, including a $40 million accumulated package for Textron CEO Lewis Campbell, and SERP calculations that include $2.6 million in dividend payments for CEO W.C. Weldon of Johnson & Johnson.
Former SouthTrust CEO and current Wachovia director Wallace Malone Jr., whose $100 million severance agreement was activated when the banking company was acquired by Wachovia, has six retirement plans from both companies totaling about $41 million, according to Wachovia's 2007 proxy.
On the other side of the coin, confectioner Hershey reduced CEO R.H. Lenny's pension benefits by 10 percent by eliminating all SERP plans effective October 2006. Sherwin Williams CEO Chris Connor does not participate in a company pension plan and received no bonus in 2006, but the paint company gave him a million-dollar salary and perks such as a car, club dues, financial planning, a home security system, and personal use of the company jet.
Extended Years of Service
One factor that can bump up the value of executive pensions is extra credit for years of service to the company, which often are provided to compensate executives recruited mid-career for unvested SERPs they leave behind at a previous employer.
For instance, Steven R. Rogel, CEO and chairman of papermaker Weyerhaeuser, has been credited 26 years of service, even though he has only been with the firm for about five years. Rogel was credited for his prior decades of work at Willamette Industries, which was acquired by Weyerhaeuser in 2002.
In 2001, Newmont, a mining company, entered into an agreement with CEO Wayne W. Murdy guaranteeing him 1.5 times his years of accredited service when calculating retirement benefits "as a retention incentive," according to the company's proxy statement this year.
Goodyear painstakingly explains the additional 15 years credited to CEO Robert Keegan include the time he served as executive vice president of Eastman Kodak. Accordingly, "the present value of accumulated benefit in the pension benefits table is $5,882,189 higher for Mr. Keegan," the tire maker said in its compensation analysis.
Valerie Ho, manager of compensation research at ISS, contributed to this article. This article originally appeared in the June 15 edition of Governance Weekly.
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