Perks: what 2005 proxy statements reveal; With more transparency in financial statements, executive perks are beginning to garner more notice. As a result, many companies are disclosing more information--voluntarily.

Citing concern that companies are not disclosing the personal use of company planes and similar perks, last October the director of the Division of Corporation Finance at the Securities and Exchange Commission (SEC) sought to change that. In a speech to the National Association of Stock Plan Professionals, Alan Beller encouraged public companies to make clear and concise disclosure in their upcoming proxy statements of all compensation earned by or paid to their executive officers, whether or not such disclosure would be required under the detailed tables and instructions of the SEC's existing rules.

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To determine what effect, if any, Beller's statements may have had on company disclosure practices in the 2005 proxy season, the author reviewed the proxy statements filed by the 100 largest U.S. public companies from the most recent Fortune 500 list, which ranks companies based on their reported revenues for 2004. The purpose of the survey was to determine which companies followed "best practices" by making voluntary disclosure of perks which were not required to be disclosed under existing SEC rules.

What Are Considered 'Perks?'

Perks that appear in the proxy statement are personal benefits that are received from the company or its subsidiaries by the named executive officers (normally the top five executives, based on their annual salary and bonus), as expressed in Item 402 of SEC Regulation S-K. There is sometimes a hazy line between a perk--which must be disclosed in the company's proxy statement if it exceeds certain thresholds (see below)--and a business expense.

For example, in his speech, Beller expressed the view that security concerns alone are not sufficient to allow companies to treat all executive travel (in company planes and company cars) as business expenses that need to be disclosed. He also noted that a benefit available to employees generally on a non-discretionary basis is probably not a perk. However, if the benefit is available for only a chosen few or is selected on a discretionary basis, perk disclosure may be required.

2005 Voluntary Perks Disclosures

Perks are disclosed in the "Other Annual Compensation" column of the company's summary compensation table, which is included in its proxy statement. The dollar value of perks and other personal benefits is not required to be disclosed in the table unless the dollar value exceeds $50,000 (or, if less, exceeds 10 percent of the named executive officer's annual salary and bonus during the year). In addition, the company is not required to specify and identify by type and amount in a footnote to the table, any perk which does not exceed 25 percent of the executive's total perks and other personal benefits for the year.

For the purpose of the survey, a company was considered to be a voluntary discloser if it disclosed perks totaling less than $50,000 (or less than 10 percent of a particular named executive officer's annual salary and bonus) or if it included footnote disclosure of a perk which represented less than 25 percent of the executive's total perks and other personal benefits for the year.

The survey does not include as a voluntary discloser any company that made no disclosure of perks in its proxy statement, whether that's because the company does not make perks available to its executive officers, the company requires the executive to reimburse the company for the incremental cost of providing the perks or for other reasons.

Forty-two of the 100 public companies included in the survey appear to have taken Beller's words to heart, as they have included additional voluntary disclosure of perks in their 2005 proxy statements. In addition, 14 companies have included both disclosure of perks for an executive which totaled less than $50,000 and disclosure of individual perks which did not exceed the 25 percent threshold. The 14 are: Exxon-Mobil, Verizon Communications Inc., Procter & Gamble Co., Valero Energy Corp., Marathon Oil Corp., American International Group Inc., Northrup Grumman Corp., PepsiCo Inc., Sprint Corp., Honeywell International Inc., Alcoa Inc. HCA Inc., St. Paul Travelers Cos. Inc. and United Parcel Service Inc.

Inadequate Disclosure Costly

In April, Tyson Foods Inc. and its former Chairman and CEO Donald Tyson settled a high-profile SEC enforcement action that was brought against the company for making misleading disclosures of perks in the company's proxy statements filed with the SEC from 1997 to 2003. Tyson Foods paid a $1.5 million penalty, and Donald Tyson paid a $700,000 penalty.

This enforcement action sends a strong message to other companies that the SEC is looking closely at, and intends to take action to prevent, inadequate disclosure of perks in the proxy statement.

According to the SEC, Tyson Foods:

1) failed to disclose over $1 million of perks (including housekeeping, lawn maintenance, automobile maintenance and telephone service);

2) mischaracterized perks by moving amounts from the "other annual compensation" column to the "bonus" column of the summary compensation table in the proxy statement;

3) used the misleading expression "travel and entertainment costs" to describe perks that could not fairly be considered as either;

4) failed to specify and identify by type and amount in the footnotes to the summary compensation table significant perks that exceeded 25 percent of Tyson's total perks; and

5) incorrectly valued personal use of company aircraft by using the tax method for calculating value, instead of the aggregate incremental cost method required by the SEC's existing rules.

The SEC also took the position in this enforcement action that the company's failure to capture information about all perks and report such information to the company's compensation committee may constitute an internal controls failure by Tyson Foods. The alleged value of the perks and personal benefits provided to Tyson (and his wife, daughters and three personal friends) during the relevant period was approximately $3 million.

It is uncertain to what extent the SEC will amend Item 402 of Regulation S-K. However, the Division of Corporation Finance is currently considering whether it should seek to enhance disclosure of total compensation and how that enhancement could be achieved, as well as how companies value perks and if there are better approaches to valuation than the incremental cost to the company method.

Proposed amendments to the SEC's regulations--which may incorporate these and other considerations--are expected to be issued some time during 2005.

2005 Proxy Statement Survey: Most Frequently Disclosed Perks

                                        Disclosure
                                        Percentage

Personal use of company aircraft        63%
Financial planning, tax or other        34%
  professional services
Personal use of company car and driver  18%
Leased car or car allowance             17%
Club memberships                        15%
Personal use of company apartment       14%
  or housing assistance
Home security systems                   12%
Spousal travel                           5%
Fitness-related activities               4%
Other (cell phone, parking, home         8%
  electronics, store gift card)

RELATED ARTICLE: takeaways

* Perks that appear in the proxy statement are personal benefits received from the company or its subsidiaries by the named executive officers (usually the top five).

* Perks are disclosed in the "Other Annual Compensation" section of the company's summary compensation table.

* In October, the SEC director of the Division of Corporation Finance encouraged public companies to disclose compensation earned by or paid to executive officers, whether or not required by existing rules.

* Proposed amendments to the SEC's regulations are expected to be issued during 2005.

John Partigan is a Partner in the Washington, D.C., office of Nixon Peabody LLP. He can be reached at [e-mail]. He was assisted in this article by Andrea Anderson.