December 13, 2005
Excerpts: The Battle For The Soul of Capitalism - Part XVII
Box 1.2 Executive “Perks”
Since what is publicly disclosed as CEO compensation excludes the host of perquisites they receive to augment their lavish lifestyles, their compensation is actually understated. Even the list below does not exhaust the remarkable benefits paid to senior management. General Electric, for example, pays 9.5to 14percent interest on salary deferrals.
- Use of company aircraft for personal travel. The cost of this most popular perk can easily run in the hundreds of thousands of dollars per executive per year. (In 2003, personal flights valued at $304,527 were paid by Citigroup for just one of its officers, executive committee chairman Robert E. Rubin, whose other pay came to $16.2million.)
- Payment of taxes on personal travel benefits. A substantial extra perquisite, essentially doubling both the benefit to the executive and the cost to the shareholders.
- Lending money to executives, then forgiving the loan. While such loans are no longer legal, forgiveness of earlier loans can go on indefinitely. Home Depot lent $10 million to new CEO Robert Nardelli in 2000, and each year forgives one-fifth of it and the attendant interest, as well as pays the taxes on both, as “an incentive for him to stay with the company.”
- Providing “amenities.” Private boxes at sporting events, entertainment, luxury apartments, country club dues, home security systems, and so on, available only to the highest paid executives.
- Payments to terminated executives. As it has been said, “corporate America takes care of its own,” but never more generously than the $140 million awarded to Michael Ovitz for his fourteen months of work at Walt Disney before being fired.
- Stepped-up retirement benefits. Generous termination bonuses and massive step-ups in pension benefits are often paid to executives when they retire, and thus slip through the reporting screen.
- Charitable contributions by corporations to the favorite causes of senior executives, which may even give credit to the CEO for his generosity.
In his detailed study of executive perquisites and personal aircraft usage, David Yermak of New York University suggests that the typical CEO fails to “recognize boundaries between the company’s assets and his own.” However, Yermak also finds that perks are a useful, if inverse, diagnostic tool for investors—the higher the perquisites, the greater the likelihood the company will perform badly.
link to book