Now that annual disclosure season has arrived, shareholders and the general public are chomping at the bit to know exactly what perks executives are receiving.  Amid the corporate downturn, many executives can only long for the glory days when personal assistants and luxurious limousines were the norm. Even though some executives still enjoy benefits like these, the economic downturn makes even the most (relatively) “tame” perks less easy to come by. Regulatory oversight has picked up and both companies and the executives themselves, along with non-executive employees, are now under a public microscope. The backlash against perks is not only an issue for the now-deprived executives though.  Perhaps an unanticipated outcome of this new corporate frugality is that whole industries which provide the perks are suffering from the scrutiny of executive benefits.

The once accepted practice of awarding these benefits to executives is coming under scrutiny, particularly at poorly performing companies.  Public trust has been broken in recent months, especially by banks receiving tax dollars that were intended to merely keep them afloat.  The snowballing movement to limit perks was jumpstarted, in part, by the passage of the Troubled Asset Relief Program (TARP), which limits the amount of compensation that can be granted to executives of companies receiving federal bailout dollars. In addition, the Obama administration has indicated that it will now review any excessive perks at companies benefiting from TARP funds.

Jumping on the bandwagon of regulatory scrutiny, the SEC is sending signals through its comment process that companies granting unreasonably extravagant perks within their executive compensation packages are going to be held accountable.  Consider, for example, a recent Verizon Communications No Action letter in which the Commission states that it doesn’t agree with the Company’s opinion that it may exclude a shareholder proposal dealing with perquisites.  Shareholders have also brought the courts on board—for example, shareholders of Take Two Interactive Software have put forth a proposal calling on the company to use social responsibility criteria when determining executive compensation. (This suit was due, in part, to the SEC’s civil suit against two former executives of who are accused of using questionable accounting practices.)

With disclosures revealing potentially scandalous details of 2008’s executive perquisites, we are seeing a decline in benefits being awarded. The call to cut back perks is being most loudly heard at the big investment banks where angry shareholders and an irate general public want the government to do something to claw back what they see as unearned awards. Bank of America has heard the call and they’ve announced that they are selling two of its aircraft and a Merrill Lynch helicopter. The cries are being heard in other industries as well as shareholders are paying close attention to every single extra benefit given to executives. Reductions in perquisites are also impacting perk-driven companies. Even the perks that remain are being reduced somewhat. As a result, company filings are showing a definite reduction in the juiciest of perks…and at the same time, reducing the juice in the business of others.

Let’s look at what is perhaps the most coveted (and notorious) perk: executive use of the corporate jet. CEOs at Abbott Laboratories, Pfizer Inc. and Bank of America have access to the corporate jet for business travel, with the latter disclosing that executives have access on a limited basis for personal travel as well. Burlington Northern Santa Fe Corp., meanwhile, discusses in a recent filing the importance of its CEO having access to the company aircraft, stating that it is in the best interest of the company that he have access because it decreases his travel time so he can focus on company business. Burlington also claims the use of a company jet protects both the CEO and the company’s confidentiality.

On the other hand, taking the opposite approach, several companies are limiting the use of company aircraft. Members of this conservative club include Hewlett Packard Marathon Oil Corp. and Marshall & Isley Corp., with the latter even selling its company-owned aircraft.  Other companies that have put their corporate jets up for sale include the New York Times, Bank of America and Citigroup. In what has to be a bow to the very loud cries to claw back executive perquisites, Citigroup CEO Vikram Pandit took it a step further by choosing to reimburse the company for nearly $172,000 in expenses related to his personal use of the corporate aircraft.

The war against perks not only impacts executives, but in a chain reaction, it has impacted industries that provide the goods and services which were once included in benefits packages.  These companies are disclosing the fact that due to dismal economic factors, they are seeing a decrease in the need for their goods and services and are attempting to find creative ways to keep their businesses afloat.  In the case of corporate jet manufacturers, several casualties stand out. While Cessna Aircraft Co. announced that it was going to have to make significant cuts to its workforce, Gulfstream Aerospace Corp. disclosed that it was going to cut its production of mid-size aircraft. Canadian private jet manufacturer Bombardier is also making cuts both to its workforce and production output.

It should come as no surprise then that aircraft part suppliers are being hurt as well. A case in point is Hawker Beechcraft Acquisiton Company LLC, which states in its risk factors that the difficult economic conditions especially in the capital, credit, general aviation and other aircraft markets, could materially adversely affect its business, financial condition and liquidity. Think this is enough? The chain reaction does not stop here. The industry downturn is also impacting jet companies which offer fractional ownership. NetJets, Inc., which is owned by Berkshire Hathaway and Avant Air, Inc. note the risk to their business by the current economic conditions, with the latter paying particular attention to the decline in consumer spending and the fact that people are traveling less or travelling using commercial air carriers rather than a fractionally owned aircraft. In this tough economic climate, access to corporate jets, which had been a luxury status symbol, is becoming a thing of the past.  

Jet usage is a clear example, but is not the only perk (along with its related industry) taking a hit in the battle against perks. Other benefits, like financial planning, club memberships, home security, and car services are being impacted as well. Rather than face the wrath of angry shareholders, companies like Cooper Industries and Bank of New York Mellon Corp., are putting a stop to certain perquisites including offering financial planning services. Bank of New York Mellon also eliminated perks including personal cars club memberships and home security.  Nonetheless, many companies continue to offer certain perks to their executives. Consider as examples M&T Bancorp and Sunoco, Inc. that offer top executives limited access to certain club memberships, BB&T and Lockheed Martin who offer home security to their senior officers and State Street Corp. and Alcoa Co. which offer automobile services.

The current economic climate has made awarding extravagant perks almost passé. As more and more companies are being forced into the public square and made to come clean about their compensation packages. Perhaps the only way to avoid total embarrassment and ridicule is to cut back on perquisites. While the golden days of opulent perks are long gone, most companies continue to provide their executives with some sort of perks.  Companies which have disclosed that they are eliminating certain perks can rest assured that they have at least saved face by making the appearance that they are trying to tighten their belts. Those which continue to award poor performance, especially banks receiving TARP funds, should be forewarned:  Even if your company is not yet in the news, somebody out there is going through your disclosures with a fine toothed comb looking for that outrageous perk that may make you tomorrow’s front page news.

Published: March 19, 2009