Executive Perquisites

In the past, executive perquisites were viewed as an acceptable form of recognition offered to the most senior executives of a company. Perquisites signal to executives that they have “made it” and provide in-kind compensation that makes an executive’s life easier. Many perquisites provided to senior executives also serve legitimate business purposes that benefit the company. For example:

• Company Car: Facilitates frequent travel involved in certain executive roles; recognizes that a significant portion of the hours logged by the executive will be in service to the company
• Personal Use of Corporate Aircraft: Supports executive security and allows executive to work and travel more efficiently than with commercial air travel; notably, this benefit is often limited to the CEO and the company frequently has a security policy that requires the executive to use the corporate aircraft for all travel, both business and personal
• Home and At-Work Security Programs: Supports executive security and the company’s risk-mitigation strategy. Helps to reduce and prevent risk of physical or cyber-based attacks on executives and their information
• Club Membership: Allows the executive to network with potential clients and/or business partners and could be beneficial to the company
• Tax Planning: Helps to ensure that the executive will pay taxes in a timely manner and avoid any embarrassment associated with failing to file a return or filing an inaccurate return

Despite these business rationales for the provision of perquisites, many compensation committee members have concluded that for the most part, they do not want to be in the business of providing perquisites to executives. Perquisites are unpopular with shareholders and shareholder advisory firms, and can potentially be divisive within a company. Shareholders view perquisites as a form of non-performance-based compensation. Critics of perquisites wonder why rank-and-file employees are expected to use their own funds to pay for certain services while the most highly paid executives in the company receive a subsidy.

At this point, the use of perquisites has reached somewhat of a steady state. The most common remaining perquisites among large companies are financial counseling/tax preparation, executive physicals and CEO’s personal use of the corporate plane. We expect that these perquisites will continue at their current levels, as they all have strong supporting business rationale, though the CEO’s use of the corporate aircraft tends to draw the most attention. Many companies manage their exposure by applying a dollar limit or a limit to the number of hours the CEO can use the aircraft each year.

The practice of providing a “gross-up” payment to the executive to cover the cost of taxes on perquisites is viewed as even worse than the perquisites themselves by many shareholders. For example, ISS labels gross-up payments as an egregious pay practice. As a result, very few companies continue to gross-up their remaining perquisites.

As companies have eliminated perquisites, they have often offset the reduction by providing a salary increase to executives. When doing so, the company should not assume that they need to make up for the cost of the perquisites on a dollar-for-dollar basis, as executives may value a cash payment more than the lost perquisites, and increases to base salary often result in indirect increases in target bonus and long-term incentive opportunities, as well as retirement benefits.

The table below provides data on the value of perquisites to CEOs and CFOs among CAP 120 companies. Note that companies are required to disclose the incremental cost to the company of perquisites unless the total value to an individual is less than $10,000, an amount viewed as de minimus. Where the total cost of perquisites exceeds $10,000, they must be separately identified by type in the footnotes to the Summary Compensation Table.

Key Questions for Committee Members to Ask:

• Do we still provide perquisites to our executives? If so, why?
• Is there a compelling business rationale for continuing to provide any perquisites?
• Is there any reason why the company could not eliminate the perquisites and replace them with a base salary increase?