Forget cushy country club memberships. Comp committees are replacing the perks they usually use to woo potential executives with something more pragmatic: compensation for the losses the top dogs take when they sell their primary residences to relocate for the job.
The comp committees of
eBay,
Nike,
Security Capital Assurance and
Orleans Homebuilders have added housing loss protection clauses to their employment contracts with top executives this year. The details of the agreements vary, but all of the companies say if the executive receives less than market value, the company will pay the executive part, if not all, of the price difference. “Market value” usually is determined by an independent appraisal of the property commissioned by the comp committee.
A growing number of companies are agreeing to absorb the real estate losses executives incur when they relocate for work, executive compensation experts say. The reasons for this are twofold. First, this perk makes particular sense given the state of today’s real estate market. Last week,
The National Association of Realtors reported that median used-home prices fell for the first time in 11 years, while inventories of unsold homes rose.
In a recent filing, eBay, for instance, said it would pay incoming CFO Bob Swan up to $700,000 on the sale of his Plano, Tex., house if it sold for below its appraisal value of $3 million. The compensation was “in light of the condition of that real estate market.”
Second, agreements to compensate executives for real estate losses are also becoming popular because they serve as an impromptu substitute for perquisites that Sarbanes-Oxley banned, according to Paul Dorf, managing director at Compensation Resources.
Before SOX, many companies would hire a third party to purchase the executive’s home. The company then would give the executive a no-interest loan to purchase a new house. The third-party contractor would sell the house and give the company the proceeds from it, which it would retain as payment for the money loaned to the executive. But SOX put a stop to this practice by prohibiting companies from giving employees loans.
Dorf says loss protection agreements aren't bad if it means the executive will be able to relocate for the new job more quickly.
“I think [relocation perks] should be the least of [the comp committee’s] worries. It’s hard enough to get the right guy or gal for the job. If I were chairman of the company, I would want the executive to move, get his family moved and put all of his concern into the company.”
Dorf does see potential for abuse of this practice, however. An executive could sell the house to a relative or friend at below-market price and then turn around and claim loss protection payment from the company, he says. Dorf isn’t aware of any instances where this occurred.
Housing Relocation Perks
|
Company
| Executive
| Loss Protection Agreement
|
eBay
| Bob Swan, CFO
| Company will reimburse up to $700,000 if Plano, Texas home sells for less than its appraised $3 million value
|
Orleans Homebuilders
| C. Dean Amann, Executive Vice President
| Company will recover up to 97% of the appraised value of his home
|
Security Capital Assurance
| Paul Giordano, CEO
| Company will pay for difference if sale price of his Wilton, Conn. home is less than average of two independent appraisals
|
Nike
| Bill Perez, former CEO
| Company paid Perez market value for his home and reimbursed him $578,000 for renovations made to the house not included in sale price
|
|
|
|
|
|
|
Source: Footnoted.org; Public filings
John Fluke, chair of the comp committee at $14 billion
Paccar, says companies shouldn’t be helping executives sell their homes. He says it is better practice for comp committees to award a signing bonus to help them with their relocation troubles. Shareholders are less likely to take issue with incentive bonuses than with other perks commonly awarded during the recruitment process, he says.
But some directors don’t view the reimbursement of relocation expenses as a perk at all.
Larry Pinnt, chair of the compensation committee at Seattle-based
Cascade Natural Gas, says relocation costs are worth the expense to the company if the potential employee will add to its shareholder value.
Pinnt was instrumental in drafting the employment contract for Cascade Natural’s new CEO,
David Stevens, last year. To relocate him from Austin, Tex., to Seattle, the company gave Stevens a $2,000 monthly living allowance, airfare and accommodations between the two cities for six months, $25,000 for moving costs, and initiation dues for a club membership.
Eleanor Bloxham, president of
The Value Alliance, an educational resource for directors and executives, says loss protection agreements are fine from a good governance standpoint if they apply to all potential employees who have to relocate.
Indeed,
Exxon Mobil’s 2006 proxy did not specify relocation costs for executives that transfer because “all affected employees participate in the company's relocation programs on the same basis.”
Microsoft, on the other hand, disclosed its relocation policy, which it specifies is only for executives. The relocation assistance program gives the executive six months to sell up to two of his houses. If he couldn't sell them in the allotted time, a third party would buy the houses at an appraised price and sell them on its own. The executive also received a relocation cash allowance of $450,000.
