Perking up for proxies

Posted by Marc Hodak on February 13, 2009 under Executive compensation | 2 Comments to Read

With proxy season just a few weeks away, all eyes will be on executive compensation.  Different people look for different things from these disclosures.

People like me, shareholder advisors and analysts, care about materiality and incentives.  Are we attracting the right people?  Are corporate funds being arbitrarily siphoned off by the management?  Based on the structure of variable compensation, what exactly management is being paid to do?  These are literally million dollar questions.

Other people, like many critics and journalists, are much more curious about the $100,000 questions.  Did the CEO use a corporate jet for personal travel?  Did they have a car and driver chauffeuring them around?   They want to know about the perks.  The smallest minds will focus on the smallest numbers, what we call the $10,000 questions:  Did the firm pay for the CEO’s tax preparation?  Will it pay for their home security?  Will it pay for their umbrella stand or shower curtains?

Many critics justify their obsession with the small numbers with what may be called the “window theory” of disclosure, claiming that the little things the boards gives away is a window on how they govern the firm.  Are they tough with the CEO?  Do they know how to say “No” when he asks to use the corporate jet to ferry his pets?

There is no evidence at all in the literature that the level of perks is correlated with how well the shareholders fare.  In fact, perks may be a very cost effective form of compensation.  Manhattan has a long history of people being able to be bought with trinkets.

Certain wealthy people will value a company-provided car and driver much more than they might an extra hundred thousand dollars.  Key executives may ascribe a much higher value to perks for the same reason that ordinary people are pissed off by them.

Also, corporate expenditures that have a plausible benefit to the firm but can also enhance the life of their executives can be very tax-advantaged form of compensation, especially given the tax penalties imposed on firms for paying their top executives.

Like everyone else, the populist in me wonders why someone making $6.2 million a year can’t pay for their own damn country club membership.  But the shareholder advisor in me doesn’t look forward to the day when it’s just all about the bucks because we can no longer bribe talented executives with trinkets.  These people will usually win on the pure dollars argument.