The war on executive perks
Posted by Marc Hodak on June 2, 2008 under Executive compensation | 
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In the latest issue of Directorship, Amy Borrus of the Council for Institutional Investors says,
Additional sunlight is chasing some perks away at some companies. That’s a good thing–perks are the polar opposite of pay-for-performance.
So is salary. Is CII advocating that CEOs be paid purely on variable compensation? That kind of runs counter to the oft-stated desire to bring down overall CEO pay. Surely, institutional investors can’t expect CEOs going all-variable to forego extra compensation for the extra risk they must bear. Their investment clients certainly would accept such a trade-off. Who would? The “it’s-not-pay-for-performance” critique of perks is too simplistic for an organization like CII.
There is only one good reason to cut perks: They look bad. It looks bad that a CEO who is making millions of dollars per year has the company paying $20,000 for a country club membership, or $15,000 for tax planning. It makes the CEO look grasping, when in fact these perks long preceded their accession from a time when they made perfect sense. It looks bad for the board because it makes them look like a bunch of stooges who can’t say “no” to the smallest thing.
The fact is that most boards can say no. They’re really not all incompetent or corrupt. They have been saying no for years. The fact is that these perks were generally good for the shareholders. They came about, admittedly in a more innocent age, because they represented tax-efficient ways to compensate their executives. If a board takes away $100,000 worth of perks that can legitimately be offered for business reasons, such as country club memberships (for business development), tax planning (to avoid personal financial issues, or fraud), or car and driver (for security), then the executive paying for those items with their own after-tax dollars would have to have their pay increased by about $200,000 to make them whole, especially if the board expected the CEO to retain many of these services.
But, since perks look bad, boards take them away, executives largely replace them at their own expense, and shareholders pick up the tab anyway, except twice over.
In a rational, depoliticized world, shareholder would prefer that perks didn’t look bad. Given our envy-driven politics, however, the only way for perks to not look bad would be for them to remain invisible to the outside world, except for their net cost to the shareholders. Shareholders don’t care that part of their CEO’s package includes $100,000 worth of in-kind, tax deductible benefits. They do care, like everyone else in this gawky age, that the CEO gets to fly in a personal jet with a bodyguard for his family. Alas, it wasn’t good enough for the corporate governance critics that these costs were already disclosed; they wanted them itemized so that the press and everyone could get a clearer glimpse into a big-company CEO’s lifestyle. Larry Ribstein rightly calls this porn for the business pages, and the moralistic coverage has had its intended effect of eliminating perks. The unintended effect is higher CEO pay.