Perquisites: The Third Rail of Executive Compensation

October 31, 2017

PERKS ARE NECESSARY, BUT HIGHLY SCRUTINIZED

Intense focus goes into executive total compensation planning each year, but organizations typically place the bulk of their attention on traditional components of pay, such as base salary levels, short-term incentive targets and pay curves, as well as their overall long-term incentive plan designs. Meanwhile, as the executive compensation professional, you’re also faced with making sure that you have competitive executive perquisites to help attract and retain the top leadership talent for the organization.

The topic of perquisites can be like the electrified third rail of executive compensation. Even though the amount of money companies spend on perquisites is the smallest piece to the total compensation pie, perquisites can trip you up. On one hand, executives point to a ‘need’ to having perquisites as an essential part of their employment relationship. On the other hand, the investment community (i.e., proxy advisory firms and large institutional investors) see company expenditures on perquisites as a potential misuse of their invested capital. They argue that executives are already highly paid individuals and can afford to spend their own money on these niceties. And thanks to the 2006 enhanced disclosure requirements required by the Securities and Exchange Commission (SEC), companies perceived as being too loose with executive perquisites risk sparking poor advisory firm evaluations, Say-on-Pay results, additional shareholder proposals, or contentious debates at shareholder meetings.

Compensation Leaders Need Perquisite Insights

To ensure you don’t go off the rails in either direction, you need good insights on market prevalence regarding the use of executive perquisites. We meet the needs of our clients and their questions about perks by using our long-running Compensation Policies and Programs (CP&P) survey. The CP&P survey covers a wide range of practices related to executive total compensation plan design, but this is the most robust source of data that specifically addresses executive perks and has been for over twenty years.

Key Findings and Trends on Executive Perks

Given the intense scrutiny, it’s not surprising that the perquisites we track in CP&P have fallen in prevalence. In the following chart, we are showing how the prevalence has changed over three time periods:

  • 1984 – when the full array of perquisites was added to the CP&P survey
  • 2006 – first year of revised reporting requirements from SEC
  • 2016 – most recent year of results

On average, the prevalence has dropped 50% from 1984 to 2016 and 29% from 2006 to 2016.

The perquisites that have remained most common tend to be those where it is reasonable to establish a mutual benefit to both the executive and the company. The best example is executive physicals, still offered by 51% of companies, where the health of the executive and their continued employment is a worthwhile return on the cost. Financial related perquisites (counseling, estate planning, and tax preparation) have also remained fairly common.

Conversely, those that are less common (e.g., chauffeur, lunch, country or health clubs) are ones where the return is less clear or there is a perception that a well-paid executive should be able to afford the cost.

Interestingly, personal use of the company plane, which had been subject to a fair amount of commentary because of the cost and perception of the benefit has remained surprisingly common. However, while the prevalence has remained near 50% the eligibility is now typically limited to the Chief Executive Officer, and often under a broader security plan requiring company plane usage for all air travel.

Perquisite Prevalence Varies by Size of Company

Larger companies are more likely to offer each perquisite, but there are some exceptions. A company car or a country club membership are probably the most traditional of perquisites and in both cases, smaller companies offer these at a much higher rate than the largest companies.

Executive physicals are a perquisite that doesn’t appear to be influenced by the size of company. Physicals are offered about half the time, regardless of the size of company.

Want More Executive Perquisite Insights?

Aon’s Executive Compensation Policies and Programs survey provides the data you need to ensure you remain competitive with your executive perquisite program while helping you avoid the unpleasant scrutiny faced by companies whose perks are too plentiful.

The CP&P survey report also provides rich detail on annual incentive plan designs and funding mechanics, long-term incentive plan designs including all types of vehicles, and executive benefit programs.

And best of all, getting the 2017 survey results is free to all participants. Contact us to learn more about this survey.

Executive Perks Survey Data in Compensation Policies and Programs 

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