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Boards Take Hatchet to Executive Perks
Executive perks are disappearing quickly as a growing number of boards scrap attention-getting benefits like country club memberships and company cars
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In the past several months, Regis, Stanley, Baxter International and BMC Software have all disclosed plans to trim back the types of perks they offer their top executives. They join the likes of Pfizer, Sunoco, FedEx and Washington Mutual, which made executive perk reductions a priority earlier this year.
In fact, some 30 Fortune 1000 companies have taken similar action in the past year, according to Equilar, an executive compensation research firm. For many boards, the increased liability that perks present far outweigh the benefits they once offered.
That’s a fairly recent change in view. In the whole scheme of executive pay, perquisites provide the greatest bang for the buck, says Paul Dorf, a compensation consultant with Compensation Resources. It does not have to necessarily be expensive. For some executives, it’s a car service so they do not have to drive during the morning rush hour. For others, it’s as simple as their own letterhead on company stationery, Dorf says.
But there are a couple of problems with perks that are pushing companies to scuttle them. The new compensation disclosure rules lowered the dollar amount at which companies must disclose perks from $50,000 to $10,000. That has made it relatively easy for shareholders and the media to review all manner of perks given out to executives. In the public outcry against what some view as overly generous compensation, perks provide a clear example of corporate excess.
“Boards have a newfound vitality” in confronting perks, Dorf says. “They’re saying, ‘Look, we’re all in this together and we’re going to go down in flames because of some stupid little thing you need."
Another factor that has fueled investor and media sensitivity to perks was the market crash of 2001. Prior to that point, Dorf points out, the bull market culture of the late ’90s had given rise to the imperial CEO who, it seemed, could do no wrong. With everyone seemingly getting richer, perks simply didn’t play as an issue with the public or the media, according to Dorf.
But now, company-paid club memberships and free use of a jet to take the family skiing strike a raw nerve. That was clearly illustrated earlier this year when Baxter International disclosed in its annual proxy that it was dumping car and financial planning allowances and home security systems for its top executives. Baxter disclosed that “this decision was made in response to changes in market practices as well as to address shareholder concerns surrounding the provision of perquisites.”
Baxter is far from alone. Of the 42 companies that have scaled back on the perks they award their executives, 46.7% and 36.7% dumped company cars and club memberships, respectively, Equilar data shows. Another 30% scrapped financial planning and 23% got rid of tax gross-ups.
More often than not, companies are not replacing those perks with cash allowances. Of the 42 companies, 60% offered no form of cash allowance or payment to cover the lost value of the perk. Of those that did, however, 20% offered a base salary increase to cover the loss of the perk, while 13.3% offered a cash allowance and another 6.7% provided a one-time cash award, according to Equilar.
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