How a Small Component in Pay Reveals Insights into Corporate Trends

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How a Small Component in Pay Reveals Insights into Corporate Trends

In a follow-up to our whitepaper, “What ‘Perks’ Can Tell Us About Executive Compensation,” ISS-Corporate reviewed the pay structures for Russell 3000 companies that held annual general meetings in the first nine months of 2024 to analyze the usage and magnitude of perquisites in fiscal 2023. In this update, we continue to focus on perquisites that are most common amongst Russell 3000 companies and have excluded those that are rarely adopted.

KEY TAKEAWAYS

  • The number of Russell 3000 companies (excluding the S&P 500) that provide at least one perquisite to their CEO increased by 2.4 percentage points, while the S&P 500 remained steady.
  • Overall, the median value of perquisites has increased faster than CEO pay over the past five years.
  • While perquisites may not play a major role in investors’ decisions to support Say-on-Pay (MSOP) proposals, companies that provide larger aggregate perquisites tend to have lower MSOP vote support.
  • Security perquisites, while relatively rare, are rapidly increasing in prevalence for the S&P 500 and Russell 3000. In 2023, 16.2 percent of S&P 500 and 2.1 percent of Russell 3000 companies provided this perquisite, up from 11.9 percent and 0.8 percent in 2019 for the S&P 500 and Russell 3000, respectively. With increasing concerns regarding the security of CEOs, both the prevalence and value of these benefits are expected to increase moving forward.

Perquisites or “perks” are generally a small component of executive compensation, a fact that has changed little from 2023 to 2024. However, these benefits tend to draw some scrutiny from shareholders and the media because of their often-unclear connection to performance criteria.

Perquisites accounted for 1.8 percent of total median CEO pay for S&P 500 companies and 5.3 percent for the Russell 3000. Approximately two-thirds of S&P 500 companies offered at least one perquisite to CEOs. For the Russell 3000 (excl. S&P 500), the number of companies offering at least one perquisite rose 2.4 percent year-over-year (YoY) to 37.6 percent.

Security Perquisites

Providing security perquisites to CEOs has continued to increase in importance as the spotlight grows on company leaders, especially those who often must take stances on potentially divisive issues. A security perquisite is designed to provide peace of mind and allow CEOs to do their jobs effectively, while simultaneously ensuring that companies are protecting their investment in the executive.

The prevalence of security benefits among S&P 500 companies continues to increase and is currently at a five-year high of 16.2 percent. Russell 3000 adoption rates have remained steady at just 2.1 percent. Given recent security incidents with high-profile CEOs, it is quite likely that the prevalence of this perquisite will increase over the next few years.

Security perquisites tend to carry significant monetary value, with the median increasing substantially compared with 2019. The overall value increases may be attributed to the continued rising costs of security personnel. Additionally, as security threats grow and evolve, the types and intensity of protection required, such as enhanced cybersecurity defenses, may be driving up the overall cost. Notably, this is one of only two benefits that have a significantly larger median value in the Russell 3000 compared to the S&P 500.

The median value of security costs in the Russell 3000 declined by 3.8 percent this past year. While the S&P 500 had a substantial increase of 56.8 percent, the total median value is still significantly lower than the Russell 3000. It is likely that in coming years, potential additions, such as armed guards and further protections provided to CEOs, may continue to drive up the cost of this benefit. Security perquisites tend to be reactionary, meaning they depend on the current news cycle and the prominence of companies in on-going public discourse. As the widespread scrutiny of specific industries or companies ebbs and flows, so do the security needs of CEOs, as they are the public face of these companies. With less mature, smaller companies making waves in the market, security demands may have increased rapidly, leading to the higher median value in the Russell 3000.

Travel-Related Perquisites

Personal use of corporate aircrafts by executives remained one of the most prevalent perquisites in 2023. For the S&P 500, 41.2 percent of companies provided this benefit in 2023, unchanged from a year earlier. The Russell 3000 saw a slight uptick to a new peak of 7.9 percent.

While the prevalence of corporate aircraft use remains mostly consistent with prior years for both indices, the YoY change in median value for this perquisite was significant. Across the S&P 500, the median value of corporate aircraft use increased by 6.5 percent to a new high of $151,163. Conversely, the annual median value of Russell 3000 corporate aircraft usage fell by 14.7 percent to $85,263 in 2023.

The prevalence of S&P 500 companies using corporate vehicle perks decreased slightly in 2023 to 20.6 percent. Conversely, the Russell 3000 appears to have made a slight rebound in 2023 with the prevalence rising to 18.3 percent. The median value of this perk rose 10.8 percent across the S&P 500 but was little changed for the Russell 3000.

It’s clear that travel-related perks remain valued benefits among corporate issuers, especially in the S&P 500. While an executive’s personal use of a company’s aircraft can draw scrutiny, many issuers may favor this perquisite in support of a tangible benefit that is otherwise difficult to provide: time. Companies, particularly those with a global footprint, may recognize the time-savings afforded by private corporate aircraft use, increasing the efficiency of their CEOs, and improving their ability to meet the extensive travel demands of their role.

Life Insurance & Financial Planning Perquisites

Companies continue to provide enhanced benefits related to life insurance and financial planning. Given the intensity of the CEO role, providing life insurance benefits can offer added peace of mind to mitigate the demands of the role. Financial planning perquisites can benefit both executives and companies as it may unburden the executives from managing their own finances, allowing them to focus more on their role, especially as it may be a challenge to balance both their time and checkbooks due to the complexity of some modern pay packages.

The prevalence of life insurance perks among S&P 500 companies continues to decrease, reaching a five-year low of 18.8 percent in 2023. Conversely, the prevalence of Russell 3000 companies providing this benefit increased in the past year but remains lower than the 2020 peak.

The prevalence of financial planning benefits increased slightly for S&P 500 CEOs and remained steady for the Russell 3000 in the past year. The rate of adoption for Russell 3000 companies is currently 6.3 percent, representing a five-year low. Although less prominent over the course of the time period examined, both life insurance and financial planning perquisites tend to be more prevalent than some other benefits provided to CEOs.

As the prevalence of life insurance perquisites has decreased amongst S&P 500 companies, the median value increased 11.7 percent YoY. Conversely, we observed a decline of 10.2 percent YoY in the median value provided to CEOs in the Russell 3000, even though adoption has increased.

The median value of financial planning perks provided to S&P 500 CEOs has remained consistent for the past three years. Of note, the median value provided to Russell 3000 CEOs in 2023 is now equal to that of their S&P 500 counterparts. This highlights that the associated expenses of this perk remain independent of the size of the CEO’s pay package and organization.

Home Relocation Perquisites

Home relocation benefits may be provided as many companies conduct nationwide or even global searches for new executives. Subsidizing the cost of moving to a new location can help attract and retain executives.

This benefit for both indexes has generally trended downward from peaks in prevalence several years ago, although the Russell 3000 saw a slight rebound in 2023 to 2.1 percent. Remote and hybrid office policies remain widely used post-pandemic, potentially driving down the necessity of this benefit overall.

Similar to security, home relocation tends to be a reactionary perquisite, as it depends on what a new CEO might need. This benefit saw a dramatic increase in both indexes, with the S&P 500 median value rising by 19.5 percent and the Russell 3000 value increasing by 26.6 percent YoY. This perquisite appears to be more costly to Russell 3000 companies as candidates may need to be enticed more often to move from larger, more metropolitan areas.

Although relocation perquisites are among the least commonly adopted, they can carry significant monetary value, with the median increasing quite consistently. The overall value increases may be somewhat attributed to the continued rising costs of housing. This benefit, coupled with security, are the only benefits that have significantly larger median values in the Russell 3000 compared to the S&P 500.

Perquisite Values Outpace CEO Pay Increases

While the amount spent on most perquisites continues to increase each year, CEO total direct compensation (TDC) has risen as well, raising the question of whether perquisites are increasing at a similar pace. When comparing the change in overall magnitude of CEO perquisites over the past five years with the increase in CEO pay, it appears that the median perquisite value has increased at a higher rate across both indexes. For the S&P 500, CEO TDC increased by 18.6 percent compared to an increase in perquisites of 31.3 percent. For the Russell 3000, CEO TDC increased by 35.3 percent whereas perquisites increased by 63.5 percent. Therefore, perquisites are not increasing proportionally to CEO TDC, but rather outpacing its growth rate. This suggests that shareholder scrutiny over perquisites may increase as their values seem to be eclipsing not only CEO pay, but inflation and many other market factors as well.

The Effect of Perquisite Values on Shareholder Vote Support

While we have noted that perquisites generally do not make up a substantial portion of a CEO’s compensation package, they are often scrutinized by investors and proxy advisory firms when holistically evaluating MSOP proposals. Due to this, we examined the relationship between aggregate perquisite values and MSOP vote support over the past five years.

Although shareholders’ analysis of MSOP will also rely on the overall magnitude of compensation, pay practices, and company performance, it appears that companies with larger aggregate perquisite values tend to receive lower MSOP support from shareholders. It is important to note that in some cases the perquisite value may not be directly responsible for lower vote support, but these increased values could be indicative of other deficiencies within the overall pay program. Shareholders seemingly have maintained their support of the use of perquisites as the benefit usually outweighs the cost, but outsized values or perquisites utilized without compelling rationale may be where they decide to draw the line.

Conclusion

Since the publication of the first ISS-Corporate white paper on perquisites, many of the observed trends remained steady, yet overall predictions did not necessarily pan out as expected. Last year we predicted that the prevalence of perquisite usage would continue to decline as shareholders were increasingly voicing concerns about them, but this past year saw a slight increase, particularly in the Russell 3000. These increases may be in part because, as noted last year, with the continued globalization of the business environment, use of corporate aircraft has continued increasing and as safety threats continue for public figures, so too has the need for security perquisites. After recent violence against a prominent CEO, discussions have already begun on how companies may better protect their executives against threats, which likely means there will be an increase in the future, not only in the prevalence of security perquisites, but in the median value as well. That said, the Internal Revenue Service’s decision in 2024 to increase scrutiny of personal use of corporate aircrafts could impact issuers’ willingness to utilize this perquisite in the future.

The fact that overall perquisite prevalence hasn’t decreased may also be a testament to the staying power of this benefit. The ability of this compensation component to weather shareholder scrutiny, media spotlight, and continue to be used frequently by companies shows that these benefits will be around for the foreseeable future.


1Source: Amanda Gerut, “Warren Buffett’s security cost $313K last year – roughly $13 million cheaper than Mark Zuckerberg’s detail”, Yahoo Finance, 3/20/2024.(go back)

2TDC is the sum of base salary, annual bonus, and long-term incentive awards.(go back)

3Source: “IRS begins audits of corporate jet usage; part of larger effort to ensure high-income groups don’t fly under the radar on tax responsibilities”, IRS, 2/21/24.(go back)

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