Executive Perks and the Impact of Disclosure

The WSJ today had a story on the executive perks that have come to light under the new SEC disclosure requirements for executive compensation.  The article was buried on page B-9 and for good reason.  There was hardly any content to the piece.  It revealed only three examples of perks deemed "substantial" (including one example where the perk, a hefty clothing allowance, was paid back) and several examples of "puny" perks (including a miniscule $5000 payment for a yoga instructor for Martha Stewart). 

Most insightful was the disclosure that about 405 companies revealed perks that fell below that mandatory threshold ($10,000) and that 35 of the 200 major corporations "have discontinued or reduced at least one perk since the new disclosure rules took effect." 

The article demonstrates the impact of disclosure on the executive compensation process, something I have discussed at length in my piece, Corporate Governance, the SEC, and the Limits of Disclosure.  Disclosure does have some impact, particularly where it reveals what might be described as embarrassing information.  Thus, the new perk requirements have focused attention on perks such as country club dues, something that often suggests unnecessary largess and a spendthrift approach to compensation.  Unsurprisingly, they have begun to fall into disuse.  The WSJ article's inability to find much in the way of embarrassing perks demonstrates this effect. 

But here are limits to the value of disclosure.  Embarrassment will not change behavior where the value of the compensation outweighs the consequences of any negative disclosure.  There are two obvious places where this occurs.  First, the total amount of executive compensation seems impermeable to disclosure.  This is true even where boards and CEOs know that the amount paid will draw fire from shareholders and the press.  Indeed, there are many who believe that disclosure of total compensation actually placed upward pressure on CEO compensation, enabling top officials to demand increases based upon a comparison of similarly situated individuals. 

Second, in the area of perks, personal use of the corporate aircraft will likely not abate even with embarrassing disclosure.  With respect to the cost-benefit calculus, there is embarrassment on one side.  On the other, however, is the value of the perk.  CEOs (and often their family members) bet the luxury of the corporate aircraft at negligible costs (the IRS requires personal use to be included in income but the amount of income is often little more than the cost of a ticket on a commercial airline).  Predictably, CEOs are willing to incur the negative publicity that can surround the perk because of its value.   

In other words, disclosure (and potential embarrassment) is no substitute for meaningful substantive standards imposed on the board in determining executive compensation.  Those standards are, of course, set by the Delaware courts, with predicable results.