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Companies Trim Executive Perks To Avoid Glare
Jet Rides, Club Dues On Chopping Block As SEC Rules Kick In
By Erin White and Joann S. Lublin
The Wall Street Journal
Friday, January 13, 2007

Some CEOs may soon learn there's no such thing as a free ride -- on the corporate jet, anyway.

Personal air travel on the company dime is among an array of executive perks some companies have begun trimming as new compensation-disclosure rules take effect.

On Jan. 1, Exxon Mobile Corp. and Lockheed Martin Corp. stopped paying executives' country-club dues.  In December, directors of General Mills Inc. capped free personal rides on company aircraft for its chief executive officer.  And E*Trade Financial Corp. said it no longer would help top executives pay taxes on their severance benefits if the company is sold.

The changes come amid sweeping new Securities and Exchange Commission requirements for additional disclosure about executive pay and perks.  The rules, which took effect for fiscal years ending after Dec. 14, require companies to reveal perks for top executives that add up to $10,000 or more apiece;  the old rules required disclosure of perks valued above $50,000.

The number of companies dropping or curbing perks is unclear.  Most won't file their annual proxy statements, detailing executive compensation, until March or April.  Of 110 large companies surveyed by Mercer Human Resource Consulting in November, 14 said they had eliminated perks or were considering doing so because of the new regulations.

But some compensation consultants and directors expect the number to grow as more boards consider the hazards of publicizing perks amid a burgeoning national outcry over executive compensation.  In recent weeks, investor anger has been stoked by exit packages in the neighborhood of $200 million for the CEOs of Pfizer Inc. and Home Depot Inc., both of whom left under fire for poor shareholder returns.

The enhanced compensation-disclosure rules "will for sure accelerate the cutbacks" in perks, says William G. Bowen, a director at drug-maker Merck & Co. who previously sat on the boards of American Express Co. and Reader's Digest Association Inc.  With their reputations on the line, board members "don't want to be embarrassed" by executive-pay practices, he says.  Mr. Bowen declined to comment on whether Merck's board is considering dropping any perks for CEO Richard Clark, who now receives a company car, limited personal use of corporate aircraft and financial counseling, among other benefits.

Information about perks that Merck provided its top executives last year will be described in the company's 2007 proxy, a spokeswoman said.

Perks coming under greater scrutiny include country-club dues, company cars, private use of corporate jets, financial-planning services and instances where companies pay executives to cover those officials' tax payments due on other compensation.  Many such items typically aren't very costly, but can attract shareholder protests.

They are also fairly common.  A Mercer study of proxies last year found that 55% of 350 large companies said they allow personal use of company aircraft.  About 50% said they paid for financial counseling, 43% for company cars, and 27% paid club dues, the study indicated.

Mark Reilly, a partner at Compensation Consulting Consortium, a consulting firm in Chicago, says many of his clients are considering trimming perks.  "The discussion is, 'How will our employees and shareowners perceive these perquisites?' " he says.  "It just sort of provides ammunition to employee groups and unions to attack your pay policy."

The companies changing perquisite policies in recent months may still have to disclose 2006 payments for those benefits in their proxies.  The companies may hope to damp investor criticism by announcing curbs on perks ahead of, or at the same time as, the disclosures.

The tactic may not quiet shareholder activists, however.  "If executives think that preemptive perk reductions will help them escape shareholder scrutiny, they are badly mistaken," says Cornish F. Hitchcock, outside counsel for Amalgamated Bank's LongView Funds.  The union-backed activist funds have objected to executive-pay practices at concerns such as Dynegy Inc., CA Inc., and Halliburton Co.

Meredith Miller, an assistant state treasurer in Connecticut, whose public-employee pension fund has about $26 billion of assets, says she is encouraged by the recent moves to curb senior-management perks.  "Transparency is one of the best antiseptics for executive pay," she says.

But she predicts activist shareholders will continue to pressure companies that eliminate highly visible perks without tackling other controversial forms of executive compensation.  "Many of the same board members who approved these perks in the past are still sitting on the board," she says.  "The day of accountability will still come."

In fact, executives don't necessarily lose in these new arrangements.  Compensation consultants expect many companies to increase other forms of compensation to make up for the lost perks.

Becton, Dickinson and Co., for example, raised CEO Edward Ludwig's salary $4,000, to $994,000, after eliminating a financial-planning perk in 2005, which had cost the Franklin Lakes, N.J., medical-technology company as much as $9,000.

Lockheed Martin said in an SEC filing that it gave executives a "one-time salary adjustment" after cutting benefits including country-club dues and financial counseling.  On Dec. 1, CEO Robert Stevens got a $40,000 raise in his base salary, to $1.52 million.  Robert Coutts, Lockheed's executive vice president for electronic systems, got a $25,000 raise, to $850,000.  A Lockheed spokesman declined to comment on whether the changes were prompted by the new SEC rules, but noted that "perks have received increased scrutiny."

Some companies had been chipping away at perks even before the SEC rules surfaced.  Becton, Dickinson in October 2005 stopped reimbursing top executives for personal financial-planning services.  In December 2005, it struck an agreement with Mr. Ludwig under which he reimburses the company for most of the cost of his personal use of company aircraft.  Becton, Dickinson said the changes were prompted by efforts to improve corporate governance.

More perks have been disappearing in recent months, as the broader disclosures required by the new rules draw nearer.  Exxon Mobil directors dropped the country-club dues perk because they decided it looked silly when executives earn enough to foot those bills themselves, according to a person familiar with the matter.  Former CEO Lee R. Raymond was reimbursed $67,035 for membership fees in 2005, according to Exxon Mobil's most recent proxy.  A spokesman declined to comment on whether the change, which took effect Jan. 1, was influenced by the new rules.

In November, Avaya Inc. halted payments to cover taxes levied on executives for personal use of company aircraft, according to a recent SEC filing.  A spokeswoman for the Basking Ridge, N.J., maker of telecommunications software and equipment says the change was "part of our normal process of examining compensation and benefits" and unrelated to the SEC rules.

In December, General Mills began to require that Chief Executive Stephen W. Sanger reimburse the company for personal use of corporate aircraft beyond $50,000 per year;  Mr. Sanger's perk used to be unlimited.  His personal use of company aircraft was valued at $73,001 in the company's 2006 fiscal year, according to an SEC filing.  A spokesman says directors approved the change, proposed by Mr. Sanger.  The CEO "felt that there should be a cap," says spokesman Thomas Forsythe.  He says the change wasn't prompted by the new SEC rules.

Other companies acknowledge that the looming disclosure requirements played at least some role in new curbs on executive perks.  Ryder System Inc., a Miami provider of transportation and logistics services, recently decided to discontinue certain severance perks for executives that had included a car allowance and financial-planning services, according to an SEC filing on Thursday.  The board decided that those perks were primarily job related, so it didn't make sense to continue to provide them once the executives were no longer employed, says Flora Perez, Ryder's assistant general counsel.  The change was partly prompted by the new disclosure rules, but more so by a desire to practice good governance, she adds.

"We certainly had our eye on the new disclosure rules," says John Daniel, manager of employee services at First Horizon National Corp.  The Memphis, Tenn., bank-holding company last month stopped reimbursing executives for taxes paid on benefits such as a car allowance, disability-insurance premiums and personal use of corporate aircraft.

Mr. Daniel says First Horizon's board compensation committee dropped the tax reimbursements primarily because they aren't seen as good governance.  When a company covers a senior official's taxes, "the perception is that the executive is getting something special," Mr. Daniel said.  "All of us in the corporate world are looking at what's the best practice in this governance environment."

Write to Erin White at erin.white@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

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