Executive Compensation and the CEO Residence

We have noted assorted aspects of executive compensation such as the use of the corporate aircraft for personal reasons, including by spouses and children.  We note with interest the article in the WSJ on the purchase of homes held by CEOs who relocated.  In particular, the article highlighted the purchase by Qwest of the home of the new CEO, Edward Mueller.  The home was purchased in September and sold three months later, with the company losing over $1.5 million.  As the article noted:

• To recruit Mr. Mueller last summer, the Denver telecom company agreed to purchase his home if he couldn't find a buyer. Qwest bought the 7,068-square-foot house for $8.9 million in September, but reaped only $7.1 million after closing costs and commissions when it sold in December, the latest proxy statement says.

A discussion of these benefits can be found in the Qwest Proxy Statement.  Facilitating the relocation of the CEO can be beneficial to the company and Qwest has particular reasons for wanting to do so.  During the Joe Nacchio years, Nacchio never relocated from New Jersey, preferring to commute every week to Denver.  See Denver Post, Dec. 25, 2005 ("Nacchio never moved to Denver, preferring to commute weekly by air from his New Jersey home and stay in a downtown Denver hotel near Qwest headquarters.")  For some, it suggested a reduced interest in the local community where Qwest did most of its business. 

Moreover, by agreeing to buy the home at market, the resale three months later almost certainly will result in a loss for the company.  It is unlikely to appreciate (and in this market will depreciate) and the company will need to incur costs (the commission to the real estate broker, for example) that will reduce the gross proceeds.

Other than ensuring that the amount paid in the first instance is the fair market value (the article says that Qwest received two appraisals), the only real issue is whether this is a wise thing for a company to do.  As noted in Qwest's case, it may well have been.  For other companies, however, this type of benefit may not be appropriate.  Moreover, the requirement to buy the house after it has been on the market for only 30 days seems a tad bit luxurious.

But all of this goes to the heart of the compensation issue.  It is understood that compensation can and should reflect the particular needs of particular companies.  But with cases out of Delaware like Disney, the truth is that there is no guarantee that the extension of a particular benefit is designed to be in the best interests of the company (and shareholders) or is designed to be in the best interests of the CEO.  It is what drives the say on pay movement.    

But one thing is for certain.  Let's hope the relocating CEO's new home is not a McMansion.