Page 356 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

342 The Complete Guide to Executive Compensation

Most companies have trouble balancing the desire to do something special for their top
executives with for the need to limit broader coverage for all employees. There is no easy
answer to this concern. Companies with egalitarian philosophies have particular trouble
justifying that some employees are “more equal” than others. Given SEC rules on disclosure,
perquisites for those covered in the proxy will not be invisible. Only a few years ago, some
companies sought out perks that did not have to be identified in the proxy statement. Fully
reimbursed medical plans, company cars, and other perquisites became very popular. Since
the SEC has lifted corporate skirts slightly with its perquisite disclosure requirements, some
shy executives are blushing from the exposure. Current rules require any perk exceeding
$10,000 annually for any individual be detailed in the proxy.
In addition, it is not improbable that the IRS will compare such data with that reported
by the individuals on their tax returns. Thus, executives must carefully document records,
differentiating personal benefit from business use. In some instances, the cost of establishing
procedures and maintaining records may exceed the cost of the perquisite, especially when
the IRS and the SEC view the same event differently. For example, hitching a nonbusiness
seat on a corporate jet making a business flight may not be considered income by the IRS but
is likely to be reportable as remuneration by the SEC.
When executives must pay full taxes on some perquisites, the perks lose a significant
amount of their appeal. For example, if personal use of a company car results in a $5,000 tax
liability, the executive must earn an additional $10,000 to pay for it (one-half paying the tax
on the income, the other half paying the tax on the perquisite), assuming a 50 percent tax. It
is not surprising that some companies substitute pay increases for perquisites—although the
company’s cost to deliver the same economic benefit to the executive is twice as much.
One approach that has some appeal is to give individual executives a perquisite allowance
of a specified annual dollar amount. This could be a common percentage of pay (e.g., 5 per-
cent). Thus, a $100,000 executive might have a $5,000 allowance, the $500,000 executive
would receive $25,000, and a million-dollar executive would have $50,000 available for use.
Or it could be adjusted based on salary. For example, the perquisite allowance could equal
3 percent for executives earning between $100,000 and $250,000; 4 percent for those
between $250,000 and $500,000; 5 percent for those between $500,000 and $1,000,000; and
6 percent for those above $1,000,000. Additionally, the program could be divided for
business-only or personal-only. While combining the two is a possibility, it would create a
hybrid tax situation to the executive, who would have a tax liability on personal items but not
on the business portion. Therefore, the combination approach may not be attractive. This
type of program recognizes that individuals have different needs and perceived values.
Therefore, rather than identifying specific programs and making participation automatic,
the programs are available for use based on the individual executive’s own interests. The
problems with such an approach are administrative design, cost issues, and record-keeping
aspects. They must also be carefully viewed in terms of SEC disclosure requirements.
In designing employee benefit plans and the perquisite package, it is important to link
them with business strategies and desired culture. Several examples illustrate this issue.
While pay for performance suggests minimizing pay for absence, the recognition of work
and family issues suggests a careful look at employee services. Lack of sufficient health care
is at the minimum a distraction from work. Survivor protection can be provided without a
great deal of cost. Focusing employee attention on company financial performance suggests
use of company stock to some degree in retirement programs. Another approach is to
enhance company payments to thrift plans when company performance meets or exceeds