Executive jet use, 'gross ups' alive, well
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Two executive perquisites curbed in recent years are personal use of the corporate jet and tax gross ups, payments to executives to cover the income taxes levied on their benefits.
Using the corporate jet for private travel is a hot button issue for pay critics, according to Michael S. Sirkin, head of the executive compensation practice for Proskauer Rose, a New York law firm. Gross ups "are disappearing as fast as ice cubes on a hot July day," according to Bruce Ellig, a New York-based pay consultant.
But the perks remain a cost of doing business for shareholders of several companies represented on this year's Fortunate 50.
Of the more than 100 executives whose compensation was analyzed, the 10 biggest users of the corporate jet received free flights valued at $941,577 last year, 8 percent less than in 2009. The 10 executives who received the largest payments to cover taxes on their perks received $343,629 last year, up 14 percent from 2009.
Compensation consultants said companies began curbing the tax payments and jet use several years ago. Mr. Sirkin said there can be valid arguments made for allowing executives to fly free on the corporate jet, either for security reasons or because it gives them more time to concentrate on business. He said it was uncommon for companies to give executives cash payments to cover taxes on the perk.
Mr. Ellig said the free flights run counter to current thinking about what executive pay should be based on.
"This is not pay for performance. This is pay for position," he said.
Mylan chairman and CEO Robert J. Coury received free flights on the corporate jet last year valued at $535,590, the highest among 102 executives analyzed. He received a tax gross up payment of $88,562 to cover taxes on that and other benefits. Mr. Coury topped the list for personal use of the corporate jet by executives of public companies based in the region the two previous years, receiving air travel valued at $433,387 in 2009 and $348,988 in 2008, according to Mylan's proxy statements.
The Cecil generic drugmaker's proxy statement said Mr. Coury was "entitled to personal use of Company aircraft for vacations and other personal purposes in light of heightened security concerns."
Allegheny Technologies permitted chairman and CEO L. Patrick Hassey to use the corporate jet to visit his family in Salt Lake City on weekends "so that he can maintain a full schedule with the company," the company's proxy stated. The metals producer announced in 2009 that it would no longer give executives cash to pay taxes on the perk.
The perk was worth $113,590 last year for Mr. Hassey, who retired this spring. His personal use of the corporate jet was valued at $85,058 in 2009 and $214,988 in 2008.
Consultants who advise mutual funds and other large investors on how to vote on proxy matters have concerns about providing help with income taxes that executives have to pay on personal use of the corporate jet and other benefits.
In its report to clients who hold Mylan stock, Institutional Shareholder Services said "paying high tax gross ups on the CEO's personal use of corporate aircraft and automobile cost ... is not an efficient use of corporate assets." It recommended that shareholders vote against the generic drugmaker's pay package.
"Most executives are paid at levels where they should be able to afford to pay their own taxes, and ISS survey data indicates that most investors believe that they generally should," ISS said in its report.
Glass Lewis, another proxy consultant, recommended that Mylan shareholders vote "yes" on the company's pay practices, saying Mylan "has adequately linked pay with performance." However, it took issue with the tax gross ups.
"As a general principle, we believe executives, like all employees, should themselves shoulder all taxes associated with the bonuses and benefits they receive," Glass Lewis said in its report on Mylan.
PNC Financial Services Group started making its executives pay for personal use of the corporate jet in 2009 shortly after disclosure that chairman and CEO James E. Rohr and clients used PNC's jet to travel to the Super Bowl. The same year, it limited perks to $10,000 per executive and prohibited tax gross ups on them.
Nationwide, more companies are adopting similar policies. General Electric chairman and CEO Jeffrey R. Immelt now pays when he uses the corporate jet for non-GE business. Mr. Immelt, whose use of the corporate jet was valued at $381,234 last year, agreed in November to reimburse GE each time he uses the company's jet for personal reasons.
In April 2010, Abercrombie & Fitch capped chairman and CEO Michael S. Jeffries' use of the corporate jet at $200,000 a year, requiring him to pay for any travel over that amount. It also eliminated tax gross ups for the perk. Mr. Jeffries' personal use of the jet was valued at $639,439 in 2009, when he received a tax gross up of $170,046 for the benefit.
However, to compensate Mr. Jeffries for modifying his employment agreement to curb the perk, the company gave him $4 million in cash.
Brandon J. Rees, a union pension fund adviser with the AFL-CIO, called that "an outrageous way to reform executive compensation."
Say-on-pay, the practice of giving shareholders a chance to vote a company's pay policy up or down at shareholder meetings, could put more pressure on companies to curb gross ups, said Mel Fugate, a professor at Southern Methodist University's Cox School of Business.
"The potential is there to ... address the gross up outrage," he said. "It's just a ridiculous practice."
First Published May 22, 2011 12:00 am