Executive perquisites are those benefits provided to executives above and beyond regular income. Executive perquisites include, but not limited to, company car, personal use of corporate aircraft, cell phones, club memberships, legal, tax and financial services, and housing and living expenses. In an Interpretive Guidance released in January 2006, the SEC indicated that a reportable perquisite confers on an executive a direct or indirect benefit with a personal aspect, is not directly related to the performance of the executive's duties, and is generally not offered to all employees.
Companies argue that they provide top executives with perquisites to retain the best leaders and allow executives to operate more efficiently and effectively (see, for example, General Electric Company's 2006 proxy statement). However, scandals such as lavish perks offered to former GE CEO Jack Welch and former Tyco International CEO Dennis Kozlowski have provoked investor and public anger. In the Welch case, the SEC found that GE failed to fully and accurately describe the substantial benefits it had agreed to provide to Mr. Welch. Mr. Welch received approximately $2.5 million in benefits under the company agreement, which included access to GE aircraft for unlimited personal use and for business travel; exclusive use of a furnished New York City apartment which had a rental value of $50,000 a month and a resale value in excess of $11 million; unrestricted access to a chauffeured limousine, the services of professional estate and tax advisors, the services of a personal assistant, etc. The SEC charged that GE violated the proxy solicitation and periodic reporting provisions of the Exchange Act by failing to accurately disclose the facilities and services Mr. Welch would receive in retirement in a manner that allowed investors to understand the nature and scope of the retirement benefits (See www.sec.gov/news/press/2004-135.htm.)
Critics assert that excessive executive perquisites are not aligned with the interest of shareholders and the available information disclosed in the financial reports on executive perquisites is too opaque and unhelpful to allow shareholders to understand how and how much the perquisite benefits are offered to executives. Some criticisms are directed at boards of directors for failure to structure the CEO's compensation package to maximize value of shareholders. Academic research (e.g., Crystal 1992; McCarroll 1993) finds that executive compensation is excessive, in comparison to that paid to lower level employees and that paid to overseas executives; and that executives are setting their own pay with no shareholder input. To improve clarity and disclosure of material information in a form more accessible to the concerned public, the SEC in 2006 required companies to provide detail about their executives' pay packages and perks.
The purpose of this paper is to examine whether there is an association between high and excess compensation and executive perquisites. Many boards of directors have operated on the principle that compensation must be in the top half or even the top quartile of some benchmark group for the company to be competitive in attracting top executives. We find that executive perquisites are positively related to the levels of CEO compensation components, including salary, bonus, total cash compensation and total direct compensation. We also assess whether CEOs receiving excess total compensation relative to other CEOs, are likely to receive higher perks. Using a comprehensive model to estimate the excess, or abnormal total compensation a CEO receives relative to other CEOs, we do not find evidence that firms award excess CEO compensation also offer high executive perquisites. Further, we investigate whether executive perquisites are justifiable because companies claim that executives "deserve" awarded perks and these perks help executives perform effectively. We examine the association between the probability of offering high perks and accounting and stock performance and we show that high executive perquisites are not related to higher accounting or stock performance.
This paper has made incremental contribution to the executive perquisite literature and is of interests to the public, regulators, and boards of directors. Companies offering perquisites have described in the CD&A their rationale, including that perquisites allow more productive use of an executive's time and greater focus on corporate activities, thereby providing a benefit to the company and shareholders. We provide empirical evidence that perquisites are not related to higher firm performance. This result is more consistent with perks being "managerial excess" and a symbol of executive status as part of the company's image.
This study continues in section 2 with a discussion of the SEC rules on executive perquisites. Section 3 develops our hypotheses, while Section 4 elaborates on empirical models. Section 5 discusses our sample selection and presents the empirical results. Section 6 summarizes the findings of the study and Section 7 discusses limitations and future research directions.
BACKGROUND AND LITERATURE REVIEW
Item 402(b) of Regulation S-K requires that the value of perquisites and personal benefits be included in the "Other...
Executive perquisites, excess compensation, and pay for performance.
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