The followingentry appeared as part of GovernanceMetrics International’s GMI Blog. GMI is the leading independent provider of global corporate governance and ESG ratings and research. Corporate stakeholders – including leading investors, insurers, auditors, regulators and others – use GovernanceMetrics services to identify and monitor risks related to non-financial measures covering key environmental, social, governance and accounting risk factors.
July 22, 2011 By Greg Ruel – Research Associate, Governancemetrics International
Executive perks continue to raise eyebrows and put a spotlight on boards. After all, if these perquisites aren’t tied to performance in any calculable way, why even bother? Is it because if she doesn’t get these perks here, she will get them somewhere else? Perhaps the CEO is “accustomed to the perk”? Does it make sense to grant a retention bonus to a company when the CEO has no real intention to exit? It’s at least worth questioning the accountability of a CEO where the company picks up the tab on the little extras he seems quiet able to afford on his own.
Granting sizeable perquisites to senior management, appearing as “All Other Compensation” in the proxy statement, on its face does not make a bad board. However, it does warrant a closer look at other board activities in order to determine whether loyalties are in order. A board willing to look the other way on seemingly unnecessary perquisites could be inclined to concede in other more critical areas of the business as well.
As GMI prepares data for our full 2011 CEO Pay Survey, Compensation Analyst and Team Leader Scott Patterson has extrapolated some of the highest perks of the year for three of the most frequently issued gratuities. Percentages stated below take into account the majority of the Russell 3000, 2,169 companies to be exact. Restricted to S&P 500 or a similar subset would produce higher usage percentages.
Aircraft Use
15% of companies surveyed cover at least a portion of personal aircraft use. The highest totals so far this year include:
Abercrombie & Fitch Co. – CEO Michael S. Jeffries received a lump sum payment of $4.2 million in 2011, largely to compensate for the elimination of his contractually obligated tax gross-ups.
Wynn Resorts, Limited- CEO Stephen A. Wynn had costs of $942,631 for personal use of company aircraft.
The Men’s Wearhouse, Inc.- CEO George Zimmer was provided benefits of $868,259 for personal air transportation.
W&T Offshore.- CEO Tracy Krohn was reimbursed $728,053 associated with company aircraft use in 2011.
Security Services
5% of companies surveyed covered various security costs for the CEO. The highest totals so far this year include:
Las Vegas Sands -$2,539,346 in security costs for CEO Sheldon Adelson and his immediate family.
Northrop Grumman Corp- $1,642,248 incurred for security protection of CEO Wesley Bush.
Amazon.com- Security Arrangements totaled $1.6 million for CEO Jeffrey Bezos in 2011.
Oracle Corporation- $1,478,600 for a residential security program for CEO Lawrence Ellison.
Tax Gross-Ups
13% of companies surveyed are still paying taxes for the CEO on perks. The highest totals so far this year include:
CBS Corporation- CEO Leslie Moonves received $2,553,311 in tax gross up related to New York State tax laws vs. his primary residence in Los Angeles.
Alexandria Real Estate Equities- $1 million went to CEO Joel Marcus to cover vesting taxes on his restricted stock. “Mr.Marcus is also entitled to a tax gross up payment, upon vesting of the restricted stock, equal to 40% of the value of the restricted stock not to exceed $1,000,000 per year”
Axis Capital Holdings- John Charman, CEO of Axis Capital, incurred $944,755 in costs for use of company aircraft.
Tyco International Ltd.- CEO Edward D. Breen received $841,566 in gross-ups to cover taxes incurred on insurance benefits.
Other payments include $9.5 million to Transdigm Group CEO W. Nicholas Howley in dividend equivalent payments, $5.6 million for Universal Health Services CEO Alan Miller for payments related to split-dollar-life insurance, and a $5 million “retention bonus “ for Analog Devices CEO Jerald Fishman that he received just for sticking around.
These perks aren’t the only indicator of a permissible board, but they’re certainly one of metrics we explore when assessing good governance. If these perks are coming along with tens of millions in golden parachutes, mega grants of stock, excessive retirement contributions by the company, etc., then there could be a real problem with CEO accountability.
Greg Ruel
The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.
To us here in Japan, the surprising thing here is not the so much the size of the perks or their existence. Japanese companies provide many perks too. Rather, the amazing thing is that most companies provide tax gross-ups for many the perks. Having worked at a US company, in one sense this is understandable, – if these were normal-sized perks and if the other compensation were at a much lower level. But given the size in these very senior cases, one wonders. With tax-gross-up, the actual after-tax value of perk "quasi-compensation" is larger than the nominal amount…providing a convenient place to "hide" things.
Nicholas Benes