Shareholder sensitivity to excessive corporate perks has continued to heighten these past few years, driven in part by a constant barrage of negative press over perks and an upward trend in SEC enforcement regarding how these perks are being disclosed. The perk perhaps singled out the most is the company’s corporate jet—and specifically, personal use of it. Although corporate jet usage has been justified in a myriad of ways (e.g., security reasons, business efficiencies, time, cost), the allowance for personal use of the company’s corporate jet remains the poster child for executive excess and potential abuse. To protect against any potential federal action or investigation into its corporate jet usage, companies should take a more affirmative stance on this particular perk, such as by enacting formal written policies to ensure that corporate jet usage is closely and regularly monitored by the board of directors. At a minimum, a formal policy regarding corporate jets usage demonstrates that the company is taking a proactive approach to this area of corporate governance, and would help provide its public relations department with an easy rebuttal whenever its corporate prerequisites are questioned.
Personal corporate jet usage remains a common perk for large Fortune 500 companies. According to a 2012 report by Equilar, a research firm that specializes in executive compensation benchmarking and research, the median value of aircraft perks rose to $110,204 in 2011—a 19.2 percent increase from $92,421 in 2010. Equilar’s report also shows that in 2011, the median value of tax gross-ups (the tax payment for a given perquisite) was $18,196—a 30.8 percent from $13,911 in 2010. The below table summarizes personal aircraft usage costs from the thirty largest US public companies in 2011, and generally supports Equilar’s findings. As Table 1 shows, more than half of these companies disclose expenses related to their CEO’s personal use of the corporate aircraft, which is often a large percentage of their supplemental compensation package.
Table 1. CEO’s Personal Aircraft Usage Costs as a Percentage of “All Other Compensation” for the 30 Largest Public US Companies (Data from 2012 Proxy Statements)
|Company||Personal Usage of Corporate Aircraft by CEO||Total “All other compensation”||%|
|American Int’l Group||$ –||$ 22,928|
|Apple||$ –||$ 16,520|
|AT&T||$ 132,166||$ 555,353||23.8%|
|Bank of America||$ 385,614||$ 420,524||91.7%|
|Berkshire Hathaway||$ –||$ 391,925|
|Chevron||$ 57,362||$ 277,397||20.7%|
|Cisco Systems||$ –||$ 11,025|
|Citigroup||$ –||$ 14,700|
|Coca-Cola||$ 122,917||$ 756,790||16.2%|
|Comcast||$ 237,176||$ 3,397,176||7.0%|
|ConocoPhillips||$ –||$ 263,522|
|Exxon Mobil||$ 197,323||$ 519,230||38.0%|
|Ford Motor||$ 178,571||$ 612,587||29.2%|
|General Electric||$ 156,193||$ 447,191||34.9%|
|General Motors||$ –||$ 55,514|
|Goldman Sachs Group||$ –||$ 449,556|
|Hewlett-Packard||$ 49,069||$ 372,598||13.2%|
|IBM||$ 489,327||$ 1,614,300||30.3%|
|Intel||$ –||$ 475,500|
|Johnson & Johnson||$ 178,920||$ 321,153||55.7%|
|JPMorgan Chase||$ 55,579||$ 143,277||38.8%|
|Merck & Co.||$ –||$ 56,374|
|MetLife||$ 50,143||$ 336,303||14.9%|
|Microsoft||$ –||$ 13,128|
|PepsiCo||$ 484,524||$ 520,416||93.1%|
|Pfizer||$ 125,299||$ 319,288||39.2%|
|Proctor & Gamble||$ 215,660||$ 312,559||69.0%|
|Verizon Communications||$ 110,204||$ 480,719||22.9%|
|Wal-Mart Stores||$ 99,861||$ 377,258||26.5%|
|Wells Fargo||$ –||$ 14,700|
|Average||$ 184,773||$ 654,673||28.2%|
*For Apple, Cisco, Microsoft, and Wells Fargo, there is no mention of aircraft usage in the most recent proxy. For Merck, personal usage is allowed, but the expense was zero in 2011. Berkshire Hathaway, Intel, and General Motors prohibit personal usage. AIG, Citigroup, ConocoPhillips, and Goldman Sachs have policies or agreements that require reimbursement for any personal use. Bank of America also has a reimbursement agreement with its CEO, but includes the expense as part of the summary compensation table to better illustrate its executive compensation.
Given the amounts shown in Table 1 and the connotations associated with this particular perk, the public is often critical of the expenses incurred by the company to cover its executives’ personal use of the corporate jet. The media often compounds this criticism, and can be counted on to regularly provide the public with analytical or anecdotal evidence of how senior executives and management of the country’s largest companies may be abusing corporate prerequisites. For example, the Wall Street Journal undertook a comprehensive investigations of corporate jet usage in 2011 and made public a database of flight data from 2007-2010 that it had collected from a Freedom of Information Act request. See Mark Maremont & Tom McGinty, Corporate Jet Set: Leisure v. Business, Wall St. J. (June 16, 2011). The public also learns of these abuses from the SEC’s investigations and prosecutions of disclosure violations involving perquisites and personal benefits received by officers and directors of public companies. See, e.g., SEC, Press Release, SEC Charges Government Website Provider & Four Executives With Failure to Disclose CEO Perks (Jan. 12, 2011). These investigations whether they are from the government or the press) often require valuable corporate resources to be spent on defending or justifying the company’s actions.
A formal written policy governing the oversight of corporate jet usage is the most straightforward way a company could minimize its exposure to these investigations and any public (or shareholder) criticism. There are many aspects worth considering, but an ideal policy would minimally address these four important things: (a) whether personal use is allowed; (b) how corporate jet usage is monitored; (c) whether the company should pay for the executive’s personal use; and (d) the reimbursement rate for any personal use.
First, best practices discourage all personal usage of the corporate jet, and as such, a model policy restricts the use of the corporate jet to business purposes only. Some large public companies, such as Intel, General Motors, and Berkshire Hathaway, do just that. A general prohibition against personal use of the corporate jet eliminates any possibility that the company (and its shareholders) will be on the hook for the executive’s personal travel costs or for any liability arising from such personal usage. It also helps the company set a tone from the top regarding how company assets should be used. An outright ban may not always be practicable, however. In those cases, a model corporate jets usage policy could still allow for limited personal use, provided it is closely monitored and the terms for reimbursement by the executive clearly defined.
Second, regardless of whether personal use is allowed, a model policy requires oversight of corporate jet usage by a board member, such as the lead independent director. Board level oversight ensures that all flights have been properly classified according to whether they were directly and integrally related to the performance of the executive’s duties. Where they are not, the trip should be deemed personal and the costs charged to the executive. While the day-to-day maintenance of these records could be delegated to someone accountable to the designated director, such as the chief compliance officer, the board (or one of its committees) should receive quarterly updates, which provide detailed summaries of how often the jet is being used for business and non-business reasons. A model policy would also require that the independent director approve all requests for personal flights in advance. Because such flights should be infrequent, the burden to get director approval would be minimal. Advanced approval carries the added benefit of keeping the director informed of any potential abuse of this perk by the executive. In short, systematic oversight of personal use of the corporate jet reinforces the company’s commitment to compliance with applicable SEC and IRS regulations and gives certainty that all trips on the corporate jet are regularly reviewed and properly classified.
Third, if an executive uses the corporate jet for personal reasons, a model policy requires that the executive reimburse the company for such use. Some companies, such as Bank of America, ConocoPhillips, and Citigroup, accomplish this by agreement. Others, such as Goldman Sachs Group and AIG, have specific policies that govern. By requiring reimbursement, the company no longer has to confront the issue of how a company should disclose personal jet usage as part of its executive compensation package (which is typically included as additional compensation to an executive and appears in the company’s proxy as part of “All Other Compensation”). A reimbursement requirement also eliminate the question of whether the company should also pay any tax “gross-ups” related to the personal jet usage. While a reimbursement policy may trigger additional tax considerations for the company and the executive, see, e.g., Deductions for Entertainment Use of Business Aircraft, 77 Fed. Reg. 45,480 (Aug. 1, 2012) (to be codified at 26 C.F.R. pt. 1), the benefits to the company far outweigh these tax considerations. Primarily, the company is no longer financially on the hook for the executive’s personal use of the company’s corporate jet and for any tax “gross-ups” it has been paying.
Fourth and finally, a model policy would specify the reimbursement rate for personal use by an objective measure. There are three primary standards to consider using: the incremental cost (e.g., the average cost of fuel, flight maintenance, and other related expenses for each flight), the cost of a first-class ticket, and the local charter rate. Most companies use the incremental cost to assign value to personal flights. Some companies, such as Goldman Sachs, use the higher of the incremental cost or a first class ticket. Best practices suggest using the local charter rate because it more accurately represents the cost of the executive’s personal flight had the trip been taken on a private aircraft. The lead independent director or his designee should be able to annually substantiate the applicable average actual charter rate and apply that rate to all flights deemed personal. Using the highest rate for reimbursement allows the company to be reimbursed an objective and accurate amount for the price of the executive’s personal flight.
In sum, a formal written corporate jets usage policy, addressing the aforementioned topics, is an inexpensive and important step toward increasing transparency surrounding complex corporate executive compensation packages. The policy may short circuit what could otherwise be costly federal investigations into compensation and prerequisites packages, and would also help the company respond quickly to media investigations or inquiries regarding the same. Creating a policy may require the company to examine its current practices, but the exercise is well worth it given the current economic environment and sensitivity to executive compensation.
Charles M. Elson is the Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He is also “Of Counsel” to the law firm of Holland & Knight. His fields of expertise include corporations, securities regulation and corporate governance. He is a graduate of Harvard College and the University of Virginia Law School, and has served as a law clerk to Judges J. Harvie Wilkinson III and Elbert P. Tuttle of the United States Court of Appeals for the Fourth and Eleventh Circuits. He has been a Visiting Professor at the University of Illinois College Of Law, the Cornell Law School, and the University of Maryland School of Law, and was a Salvatori Fellow at the Heritage Foundation in Washington, D.C. and is a member of the American Law Institute. Professor Elson has written extensively on the subject of boards of directors.