Executive Perks-Whats Appropriate Today

Executive Perks - Whats Appropriate Today

04/01/04
By: Martha Frase-Blunt, SHRM.org

The excesses of executive perks – exemplified by Tyco International CEO Dennis Kozlowski’s $6,000 shower curtains and fantasy parties in exotic locales – have riveted and appalled the working public, leaving many employees to wonder how lavish perks for top company officials offset their own potential earnings. Crafting packages that attract and reward top talent without crossing into the kinds of gratuitous extravagance that alienate workers and shareholders alike is a vital HR challenge in this post-scandal environment.

“Perks” are any supplemental reward not tied to performance. Typically, their purpose is to reward a company’s top officers in a way that either conveys status or enables them to do their jobs more efficiently – and sometimes both. A survey last year by Compensation Resources Inc., a consulting firm in Upper Saddle River, N.J., identified the following as the most popular executive perks across all industries, along with the percentage of companies providing them:

• Holiday parties/gatherings – 66.7 percent
• Company car – 50 percent
• Severance agreement – 33.3 percent
• Financial counseling – 16.7 percent
• Country club membership – 12.5 percent
• First-class air travel – 12.5 percent
• Spouse travel – 3.1 percent

Spotlight on Extravagance

Perks, of course, can be far more opulent – private planes, exotic cars, luxury apartments and munificent retirement packages are not uncommon at many corporations. But public revelations – such as ex-Vivendi CEO Jean-Marie Messier's $17.5 million Park Avenue apartment and former Global Crossing CEO Robert Annunziata’s Mercedes Benz SL500 and corporate jet – are raising questions about the role of executive perks.

Even the excessive use of more mundane perks can raise eyebrows and generate bad press, as when a messy divorce revealed that former GE CEO Jack Welch received perks including court-side seats to the New York Knicks and U.S. Open, seating at Wimbledon, box seats at Red Sox and Yankees baseball games, country club fees, security services and restaurant bills, in addition to a “perks for life” retirement deal that included a $15 million Manhattan penthouse and a private helicopter (in addition to his $9 million annual pension).

“The role of executive perks is changing, but they will always have a place in compensation,” says Professor David B. Balkin, Ph.D., of the Leeds School of Business at the University of Colorado, Boulder. “There is still a need to reinforce the status of the senior executive in a symbolic way, so that outsiders know they are negotiating with someone of substance.”

But increasingly, perks are also expected to enable executives to be more efficient. “For example, in New York City, a limo service allows an executive to conduct business in comfort while maneuvering through traffic jams, ” Balkin says. “For these people, wasted time is also wasted money.” Balkin adds that some executives can make the same argument for private jet travel. “No waiting at airports or changing planes when they visit geographically displaced clients or offices. It can be very cost- and time-efficient,” he notes.

But too often, lines between necessity and desire are blurred, then crossed. “Pampering CEOs and treating them like spoiled infants is not good for them,” says Balkin. “That’s why they should not be put in a position to demand their own perks; it should be left to the compensation committee or the HR function to set boundaries and determine what is appropriate.”

Alienated Employees -- and Shareholders

Perks have a direct impact on perceptions about company culture, believes Balkin. For example, at West Coast high-tech companies, which were forged in an environment of bootstrap egalitarianism, executive perks are rare. But within the East Coast banking and finance establishment, luxury rewards are central to the culture.

Most other employers fall somewhere between the two extremes, searching for balance between providing incentives for executives and not alienating employees and stakeholders.

Executive perks are under more scrutiny than ever, thanks to new disclosure laws. According to HR consultant Steve McElfresh, president of HR Futures in Palo Alto, Calif., “Sarbanes-Oxley has increased public scrutiny of all forms of compensation. I am seeing more boardroom discussions about what ‘smells right.’”

Paul Dorf, managing director for Compensation Resources Inc., notes that public companies must disclose any individual perks worth more than 10 percent of salary, or more than $50,000 total. “But that’s easy to get around,” says Dorf. “Smaller luxuries – like office redecoration and tickets to sporting events – won’t show up on the proxy statement, no matter now many of them are accrued. And many companies simply call these perks ‘business expenses’ so they are not itemized.”

But even if executive rewards are not revealed in the public domain, be aware that the rank and file is watching closely. Dorf tells the story of one of his former employers — a large, well-known private company that was suffering hard times. “During the period employees were under salary freezes, all three partners were rewarded with new Rolls Royces. It was seen as the ultimate betrayal.”

Shareholders, too, are on perk alert. The Investor Responsibility Research Center in Washington, D.C., reports that more than one-third of the shareholder proposals submitted for proxy season 2004 address excessive compensation issues, including reining in executive pay and perks.

HR’s Role: Drawing the Lines

As the administrative and cultural link between employees and senior management, HR has an important role to play. “HR can enforce fairness and consistency in executive perks,” says Dorf. “That doesn’t mean you can’t have two tiers of benefits, but there has to be some structure to it.” For example, if a company is willing to pay a chief executive’s exorbitant moving expenses, how can the company deny offering something similar, albeit simpler, to employees at large?

HR professionals can help their organizations set guidelines for executive fringe benefits. This can be done by starting with a few simple questions:

• Are perks flowing to senior executives useful and job-related? Does it make them more effective? “If perks are job related and defendable, no one is going to second guess them,” says Balkin.

• Are perks really necessary to motivate the recipients? Or are they simply a habit? A better option, believe many compensation experts, is to tie more benefits to performance. And pay-for-performance can be extremely rewarding to top brass. “Incentives are making large gains,” says Dorf. “Ten years ago, it was not unusual to see their value matching 25 to 30 percent of salary. Now it can be 75 to 100 percent.”

• If perks are intended to evoke status as part of the company’s image, are you going too far? “If you would be embarrassed to have your CEO’s perk package disclosed on the front page of The Wall Street Journal, they might be viewed as excessive,” Balkin says.

And HR should frequently take the resentment temperature of the workforce to ensure that all is well. “I don’t suggest that CEOs need to stand before the company and disclose every item,” says Dorf. “But perks should be dispensed with sensitivity, and executives should not flaunt them.”