Facing greater disclosure, boards are cutting back on CEO extras
from chauffeur service to deferred compensation
By Joann S. Lublin
The Wall Street Journal
Monday, April 9, 2007
Golden goodies for America's highest bosses are starting to lose
A growing number of corporate boards no longer treat chief
executives like monarchs -- largely because their royal rewards
lack justification. Boards are trimming or dropping everything
from perquisites to severance pay, deferred compensation and
supplemental pension plans.
The moves come amid toughened pay-disclosure rules and
directors' increased risk of shareholder lawsuits and election
challenges. The Securities and Exchange Commission adopted
sweeping regulations last year that widen what companies must
reveal about executive compensation -- and for the first time
require the full board to approve and be legally responsible for
the proxy statement's report on pay practices.
"Some of the recent changes in CEOs' perks and overall
compensation levels are clearly driven by the changed disclosure
rules," says David Yoffie, a Harvard Business School professor
on the board compensation committees at Intel Corp. and Charles
Such "pay practices are now being discussed by the entire board
to an unprecedented degree," says Charles Elson, a HealthSouth
Corp. and AutoZone Inc. director who runs the Weinberg Center
for Corporate Governance at the University of Delaware business
Boards' hottest target? Perquisites. On top of their salaries,
bonuses, stock options and restricted shares, most chiefs enjoy
a stunning array of benefits. These often include free
financial planning, home-security systems and chauffeur-driven
cars. The perks frequently cost a company relatively little,
but draw considerable criticism as symbols of irrational
Under the new disclosure rules, proxy statements must list
executive perks valued at $10,000 or more apiece. The old rules
limited disclosure to perks valued above $50,000. With their
reputations on the line, directors fear being embarrassed by the
A sample of companies that have recently cut or curbed the
following perks for the top boss:
• Financial Counseling: Fannie Mae, Lockheed Martin
Corp., Exelon Corp.*, Sunoco Inc., Fortune Brands Inc.
• Club Membership Dues: Fannie Mae, Toro Co., Exxon
Mobil Corp., Lockheed Martin, Exelon, Fortune Brands, Florida
Rock Industries Inc., Gannett Co.*, Sunoco
• Personal Use of Corporate Aircraft: General Mills
Inc., Wendy's International Inc.
• "Gross Up" Payments to Cover Executives' Tax Bite on
Certain Benefits: E*Trade Financial Corp., Fannie Mae, AT&T
Inc., Sunoco, Sara Lee Corp., First Horizon National Corp.,
• Company Car: Exelon*, Fortune Brands, Florida Rock
Industries, Sunoco, Wendy's International
*Effective in 2008
Source: Regulatory filings or company announcements
Twenty-eight businesses cut or curbed at least one CEO
perquisite in 2006, concludes a proxy analysis of 350 major U.S.
corporations by Mercer Human Resource Consulting for The Wall
Street Journal. Among them: personal use of corporate aircraft,
club membership fees, and "gross up" payments to cover officers'
tax bills for other compensation. Washington Mutual Inc., one
of the 28 companies, said CEO Kerry K. Killinger had just one
perquisite last year -- personal usage of corporate aircraft --
and began reimbursing his employer for such use at the start of
Some companies acknowledge the expanded proxy requirements
played a role in their killing certain perks. "We certainly had
our eye on the new disclosure rules," says John Daniel, an
executive vice president at First Horizon National Corp. In
December, the Memphis, Tenn., bank holding company stopped
reimbursing executives for taxes paid on benefits such as a car
allowance, disability-insurance premiums and personal use of
First Horizon's board pay panel primarily halted the
reimbursements because they no longer were seen as good
governance, according to Mr. Daniel. When a business covers a
senior official's taxes, "the perception is that the executive
is getting something special," he says.
Dissident investors occasionally claim credit for pared perks.
Applebee's International Inc. is struggling with depressed
earnings and a proxy fight by hedge-fund activist Richard
Breeden. His Greenwich, Conn., investment firm, Breeden
Partners LP, holds about 5.4% of Applebee's shares. In a
January letter to the chairman of the Applebee's compensation
committee, Mr. Breeden lambasted what he suggested were
extensive flights on corporate planes by former Applebee's CEO
Lloyd Hill. The company's planes had flown 29 times since last
April in and out of Galveston, Texas, where Mr. Hill "happens to
own a beach house," the letter said.
Mr. Hill has remained board chairman since he left the corner
office last September. Laurie Ellison, an Applebee's
spokeswoman, says she doesn't know how many of those 29 flights
Mr. Hill was on.
Shareholder interests aren't served "by turning corporate
aircraft into flying limousines for senior executives' personal
vacations," the Breeden letter argued. Mr. Breeden, a former
SEC chairman, thinks his attack persuaded Applebee's directors
to ban senior officers' personal use of the company's sole
remaining plane, effective March 1. (It recently sold its other
plane.) The rides will occur only "in the case of a medical
emergency or other extreme hardships," the Overland Park, Kan.,
restaurant chain states in its latest proxy. The board updated
the policy to reflect "best business and governance standards,"
Ms. Ellison says.
A handful of chiefs are encouraging the perks retreat,
undoubtedly "because they're worried about internal optics as
lavish benefits can demoralize a work force," says G. Steven
Harris, a Mercer senior executive-compensation consultant.
Sunoco Inc.'s John G. Drosdick asked the Philadelphia refiner
and gasoline retailer to cease tax gross-ups for his personal
use of corporate aircraft, the current proxy says. He also
abandoned his company-provided car, financial counseling and
country-club dues. In addition, he decided to pay Sunoco
upfront for the full annual cost of his company parking space
and home-security monitoring system.
Mr. Drosdick can well afford the extra tab. Perks accounted for
$77,855 of his total 2006 compensation, which Sunoco valued at
about $23 million. "The proxy statement speaks for itself,"
says spokesman Jerry Davis.
Similarly, Exelon Corp.'s plan to drop most executive
perquisites next January was strongly supported by Chief
Executive John W. Rowe, says Gary Snodgrass, chief
human-resources officer for the Chicago electric utility. And
Mr. Rowe rejected the $50,000 he is entitled to under the
company's plan to give officials one-time transition payments to
cover their canceled company cars, financial planning and club
memberships, because "he felt it was unnecessary," Mr. Snodgrass
says. "John had a pretty good year last year." Mr. Rowe's 2006
compensation totaled $16.4 million, a regulatory filing
Not all CEOs simply lose out when they lose perks. Norman H.
Wesley, the longtime chief of Fortune Brands Inc., received
$87,826 in perks last year -- a small piece of his $10.8 million
total compensation. The Deerfield, Ill., consumer-products
giant abolished some of those perks -- his allowance for
a car, financial planning and country-club membership -- last
month. In return, the company bumped up his salary $14,000, to
$1.25 million. The idea was to simplify compensation "and keep
everyone whole in the process," says company spokesman Clarkson
Perquisite reductions "get rid of this nickel-and-dime stuff,"
says Charles Haggerty, a retired leader of Western Digital
Corp., who's mulling similar moves at four other companies where
he chairs the pay panel. But "in the grander scheme of things,"
he adds, "perks aren't a big item."
Harder to Let Go
The more-valuable goodies -- such as severance pay, deferred
compensation and supplemental pensions -- are disappearing more
slowly, even though the new proxy rules highlight their
stupendous size. Jerry A. Grundhofer, chairman of U.S. Bancorp
and CEO until his December retirement, amassed $111.4 million in
deferred compensation and pension benefits, for instance. Teri
Charest, a U.S. Bancorp spokeswoman, says Mr. Grundhofer can now
collect his years of accumulated benefits, but she declines to
say whether he does.
Among these big-ticket items, huge severance deals have come
under the sharpest attacks. At least a dozen big businesses
recently shrank or ended senior officers' promised severance.
Abbott Laboratories CEO Miles D. White and two top lieutenants
terminated agreements that would have rewarded them handsomely
after a takeover of the Abbott Park, Ill., drug and
medical-device maker. More than $25 million of Mr. White's
stock options and restricted shares would have vested if Abbott
had changed hands last Dec. 31, the latest proxy reports. He
would have been eligible for three years' salary and bonus,
too. Mr. White believes a change-in-control accord isn't
necessary, says company spokeswoman Melissa D. Brotz.
Sumner Redstone, executive chairman of Viacom Inc. and CBS Corp.
in New York, is among the few business titans to relinquish
deferred compensation. He and fellow directors revised his pay
packages so they're more closely tied to shareholder returns,
according to both companies.
Mr. Redstone previously collected $1.3 million a year in
deferred compensation from Viacom and CBS -- plus two salaries.
He changed his mind partly because Philippe Dauman spurned
deferred compensation when he took the helm of Viacom last
September, Viacom spokesman Carl Folta says.
Mr. Redstone, the media conglomerate's chief before it split
early last year, also swapped his $9.4 million of deferred
compensation for Viacom options and lowered his $1.75 million
salary to $1 million at both companies. CBS recently agreed to
settle a shareholder suit filed against Viacom before the split
that alleged directors breached their fiduciary duty by
approving nearly $160 million in compensation for Mr. Redstone
and two other executives after a year in which Viacom's share
price fell nearly 20%.
Still Not Happy
Several other employers are curtailing their chief's potential
payout from a supplemental executive retirement pension, or
SERP. Such pensions can be very expensive because they usually
reflect compensation earned during the last years of an
Wendy's International Inc. will roughly halve its annual SERP
contributions for officers this year following a review launched
by CEO Kerrii Anderson while she was finance chief, recalls
Jeffrey M. Cava, an executive vice president at the Dublin,
Ohio, fast-food chain. "Times had changed," he says.
Such steps, however, fail to mollify disgruntled investors.
They say too many chief executives still reap sizable
compensation despite poor performance. They vow to step up
their activism by seeking lifetime limits on equity grants,
eradication of employment contracts -- and board seats.
Businesses with the worst investor returns typically "have not
made any attempt to link performance and compensation and are
substantially overgenerous," says Mr. Breeden, the Applebee's
dissident. He finds board members only "get religion about
executive pay when somebody runs against them."
Write to Joann S. Lublin at