Securities Law Blog

Earlier this month, the Securities and Exchange Commission (SEC) settled charges against a public company for failing to disclose in its annual proxy statements the full extent of the executive compensation paid to its Chief Executive Officer.

According to the SEC’s order, the company failed to disclose approximately $1,000,000 worth of perquisites and other personal benefits provided to its Chief Executive Officer, including expenses associated with his authorized use of chartered aircraft for personal purposes. As a result, the company significantly understated the “All Other Compensation” portion of its Chief Executive Officer’s compensation in the Summary Compensation Table of its proxy statement for several years. The SEC found that the company issued proxy statements containing materially false or misleading statements that altered the “total mix of information” considered by shareholders in making a voting decision and failed to maintain policies, procedures or controls designed to ensure that all potential perquisites and personal benefits are identified and analyzed for complete and accurate disclosure in its proxy statements.

A public company’s proxy statement must contain the information specified in Schedule 14A, including tabular and textual executive compensation disclosures pursuant to Item 402 of Regulation S-K. Item 402(c)(2)(ix) of Regulation S-K requires disclosure in a company’s Summary Compensation Table of the total value of all perquisites and other personal benefits provided to named executive officers who receive at least $10,000 worth of these items in any year.  Instruction 4 to Item 402(c)(2)(ix) also requires identification of all perquisites and personal benefits by type, and quantification of any perquisite or personal benefit that exceeds the greater of $25,000 or 10% of total perquisites, in a footnote to the table. 

According to the SEC’s 2006 release adopting Item 402, “an item is not a perquisite or personal benefit,” and does not need to be reported, “if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

The release also states that “the concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, [versus] an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.” Further, even where the company “has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,” that determination “is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes.”

Public companies have generally classified the following “All Other Compensation” column items as perquisites or other personal benefits that may require disclosure pursuant to Item 402(c)(2)(ix) and Instruction 4 thereto:

• Personal tax and financial planning and counseling services
• Executive health screening programs, wellness incentive awards and additional medical services
• Executive security program for the executive (discussed below)
• Permitted personal use of the company’s corporate aircraft, reported at the company’s aggregate incremental cost
• Company-provided car and driver (plus tolls, fuel and insurance)
• Value of company-related merchandise
• Matching contributions or allocations to the executive’s 401(k) savings plan or other deferred compensation plans
• Charitable matching contributions and gifts associated with corporate events made by the company
• Tax reimbursements, or “gross-ups”
• Reimbursement of executive life insurance and disability policy premiums
• Excess personal liability insurance and coverage under a retiree plan
• Housing allowance and relocation costs or reimbursement for temporary living expenses
• Athletic, social and country club membership and dues
• Tickets for sporting and other entertainment events
• Reward trip or award in recognition of service
• Dividends accrued in the form of dividend equivalents on restricted stock units
• Incremental travel costs, including transportation, meals and hotel, for the executive’s family members
• Severance-related benefits payable in connection with a termination or change-in-control

More recently, questions about the need for personal security of top executives have been raised. This has given rise to a debate as to whether personal security-related costs are compensation under Item 402 or a business expense. In situations where an executive is the subject of specific risks or threats to their safety as a direct result of their unique position as an executive of a company or within a particular industry (in other words, the executive is synonymous with whatever negative sentiment there may be about their company or industry), executive protection costs are arguably “integrally and directly related to the performance of an executive’s duties.”

In these circumstances, the costs of various security measures – including security at the executive’s personal residences and during personal travel – could be argued as not being a perquisite or personal benefit that would require such costs to be included in the particular executive’s compensation disclosure. Such disclosure could even provide breadcrumbs to those looking to see which executives have more security than others. A company’s board of directors would need to evaluate its overall executive security program to provide oversight and periodically assess business-oriented safety concerns with independent security personnel to determine whether disclosure under Item 402 is required.