How would you like to fly on a personal jet, belong to a fancy country club and have a personal trainer — all on someone else's dime?
If so, become a CEO. Corporate chief executives are enjoying these and other perks, and investors are picking up the tab. They pay through reduced earnings attributable to these outrageous perks at companies whose shares your clients own, whether directly, or indirectly through mutual funds.
At a time when everyone is tightening his or her belt, mutual fund portfolio managers should be exercising their fiduciary duty to investors and become more vocal.
They should question corporate boards that still feel compelled to dish out outrageous perks to chief executives who already earn millions in compensation and can well afford to buy for themselves whatever luxuries they want.
Lavish perks are essentially pay for position, not pay for performance, and savvy portfolio managers should have their antennae up when they see companies being irresponsible. After all, if corporate boards can't say no to expensive executive perks, what will spineless directors do when issues arise that have greater consequences?
With the economy still shaky and shareholders desperate for greater returns, I wondered why so many boards turn a deaf ear to perks, so I asked an expert to explain what's going on.
'EASY TO HIDE'
Boards give out perks because “they're still pretty easy to hide,” said Michelle Leder, founder and editor of Footnoted.com, a unit of Morningstar Inc. that digs through company filings to find questionable self-dealing.
“Most people don't spend their limited time reading the footnotes to a proxy statement or an employment contract, which is the only place you're really going to find any sort of disclosure about perks,” she said.
“I think there may be a role for some limited perks, but I definitely think they've gotten out of control at many companies, and now it's almost become a "keeping up with the Joneses' sort of thing.”
I asked Ms. Leder if financial advisers should look at companies that throw lavish perks at senior managers with an eye on whether the management team is putting itself first and not paying attention to the bottom line or their shareholders.
“Absolutely. The problem is that finding the details takes a lot of work,” Ms. Leder said.
“In a recent newspaper article, it was reported that a lot of corporate jet travel is just not making it into the SEC disclosures in any sort of realistic way,” she said. “Given how difficult the information is to find, the least companies can do is be truthful about the actual costs.”
If you want to get a sense of why I'm annoyed, here's a quick look at what some companies provide their top executives:
• Oracle Corp. spent nearly $1.5 million for CEO Larry Ellison's home security services. For the record, he has collected more than $1.8 billion in Oracle compensation over the past decade and has a net worth that ranks him sixth on Forbes' list of the world's wealthiest people.
• Black & Decker CEO Nolan Archibald received compensation worth $25.8 million in 2010. As chairman of the newly merged Stanley Black & Decker, he'll get $43.3 million in 2011 and a bonus of up to $45 million in 2013. His 2010 perks were valued at more than $600,000, including $526,391 for personal travel on the company jet, $39,676 for
financial planning, $25,722 for cars, $4,528 for sports and entertainment tickets, $1,820 for club dues and Black & Decker products valued at $2,685.
• Macy's Inc. CEO Terry Lundgren, who received 40% discounts on store merchandise valued at $53,543, got more than $33,000 to cover the taxes on those discounts and the imputed income covering travel costs for his wife. Mr. Lundgren's 2010 compensation was valued at $14.9 million.
• Occidental Petroleum's Ray Irani received nearly $391,107 worth of
financial planning advice, on top of compensation worth $76.1 million last year.
Let's be honest — everyone loves a good perk. But corporate America continues to take it way too far and at the expense of shareholders.
It's time that portfolio managers, as well as advisers, let public companies know that the owners of the companies are tired of seeing the top hired hands siphon off more than their fair share. Enough is enough.
