Executive Compensation and Personal Use of the Corporate Jet
J. Robert Brown | Monday, July 2, 2007 at 06:15AM We have been discussing the North Dakota Publicly Traded Corporations Act and will pick up on the topic again tomorrow. Instead, we take a brief detour into executive compensation.
On Saturday, June 30, the Wall Street Journal published a story about the perqs given to CEOs or board chairmen of public companies, something of growing interest in the aftermath of the SEC's reform of executive compensation disclosure. The largest seemed to be the right to use the corporate jet for personal reasons. In many cases, the CEO is allowed to make personal use of the aircraft. Companies often justify this by contending that it is necessary to ensure the security of the CEO. The WSJ also noted that sometimes this right was extended to the CEO's family, including children. As the Journal reported, some of the officers who made the most use of this benefit included:
- Abercrombie: Chairman and CEO Michael Jeffries: Personal use of corporate aircraft (less reimbursement of certain amounts by Mr. Jeffries): $776,723
- Black & Decker: Chairman, President and CEO Nolan Archibald: Personal use of corporate aircraft: $437,317
- EBay: President and CEO Meg Whitman: Personal use of corporate aircraft: $773,467
- IAC/InterActive Corp: Chairman and CEO Barry Diller: Personal use of corporate aircraft: $517,214
- J.C. Penney: Chairman and CEO Myron E. Ullman, III: Personal use of corporate aircraft: $567,067
- Southern Union: Chairman, President and CEO George L. Lindemann: Personal use of corporate aircraft: $609,862
- Textron: Chairman, President and CEO Lewis B. Campbell: Personal use of corporate aircraft: $507,053
- United Technologies: Chairman and CEO George David: Personal use of corporate aircraft: $612,303
- Wrigley: Chairman William Wrigley, Jr.: Personal use of corporate aircraft: $540,210
For purposes of disclosure of executive compensation, personal use qualifies as compensation. Moreover, the fact that companies require use of corporation aircraft even on personal trips to ensure the security of the officer does not alter the characterization. See Exchange Act Release No. 54302A (August 29, 2006) ("A company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.").
Why are these officers accepting such a high amount of compensation in the form of air travel on company aircraft? Perhaps it is because they have no choice having been forced by the company to fly private aircraft in order to ensure their safety. But it may also be because compensation for SEC purposes is not the same as compensation for IRS purposes. Under the IRS formula, these officers likely pay taxes on substantially lower amounts.
The SEC requires perquisites to be valued at their incremental costs to the company. See Instruction 3, Item 402(k)(2)(vii). Presumably, in the case of aircraft, this means the actual costs resulting from the personal trip, something that would include the salary of the pilot, the amount of fuel, and airport charges. See Mckesson Proxy Statement, June 13, 2007 ("In calculating that cost, the Company determined the direct operating cost per flight hour for each aircraft, which includes costs for fuel, maintenance, labor, parts, engine restoration, landing and parking fees, crew expenses, supplies and catering.").
For a CEO making a 2000 mile trip to play golf, this could result in a considerable sum. For purposes of the IRS, however, the agency relies on the "standard industry fare level" which looks to such factors a the number of miles flown and the size of the aircraft. The IRS periodically updates this formula. How much would our golf playing CEO be charged as income for the flight? At least in many cases, not much more than the cost of a plane ticket on a commercial airline.
In other words, they are using the company jet, often to the tune of hundreds of thousands of dollars, but paying taxes on a substantially smaller portion of that amount (assuming, as is sometimes the case, that the company is not picking up that tax burden). Given this disparity between SEC requirements and IRS regulations, use of corporate aircraft for vacations and other personal outings by top officers will likely increase.
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