Professor Bainbridge...on law, politics, religion, culture & food

Executive Perks: Golf Flights

Provocative analysis in the WSJ($) of a major perk corporations give their CEOs: free flights to golf resorts and tournaments:

There are thousands of corporate aircraft flying the skies over the U.S. Most companies say these planes are necessary to conveniently and securely transport employees to distant facilities or meetings. Top executives "are really 24-hour-a-day, seven-day-a-week people," notes Mike Nichols, an official with the National Business Aviation Association, a trade group. "These are really flying offices."

But a comparison of golf scores and flight records, some of which are available from commercial aviation-data services, shows that companies also use their jets for another purpose: as airborne limousines to fly CEOs and other executives to golf dates or to vacation homes where they have golf-club memberships.

At some companies, hundreds of flights in recent years have involved golf, played either for business, pleasure or both. Among companies whose top executives have flown on corporate jets to golf destinations are Alltel Corp., Motorola Inc., General Dynamics Corp., McKesson Corp., Verizon Communications Inc., SLM Corp. (Sallie Mae), U.S. Steel Corp., Cintas Corp., PNC Financial Services Group Inc. and National City Corp.

Companies usually pick up the tab for personal travel on their jets, so each trip can cost shareholders tens of thousands of dollars. The full cost of these flights can be hard to unravel. Under Securities and Exchange Commission regulations, companies must disclose the annual so-called incremental cost of personal travel by top executives once the cost of total perquisites exceeds either $50,000, or 10% of an executive's annual salary and bonus. Companies typically define incremental cost as the added expense of a given flight -- such as fuel, landing fees and a crew's hotel costs.

HT: Paul Caron, who observes:

The article cites the findings by David Yermack (NYU, Stern School of Business) that CEOs who belong to golf clubs far from their company's headquarters tend to be big users of their company planes. The publicly disclosed cost of aircraft use for these CEOs is two-thirds higher, on average, than for CEOs who are not long-distance golf-club members.  I tracked down the paper, Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns, on SSRN.

As I observed in my article Executive Compensation: Who Decides?, perks can be a legitimate form of compensation:

If managerial power has widespread traction as an explanation of compensation practices, one would assume that the evidence would show no correlation between the provision of perks and shareholder interests. In fact, however, The Economist recently reported on an interesting study of executive perks finding just the opposite:

Raghuram Rajan, the IMF’s chief economist, and Julie Wulf, of the Wharton School, looked at how more than 300 big companies dished out perks to their executives in 1986-99. It turns out that neither cash-rich, low-growth firms nor firms with weak governance shower their executives with unusually generous perks. The authors did, however, find evidence to support two competing explanations.

First, firms in the sample with more hierarchical organizations lavished more perks on their executives than firms with flatter structures. Why? Perks are a cheap way to demonstrate status. Just as the armed forces ration medals, firms ration the distribution of conspicuous symbols of corporate status.

Second, perks are a cheap way to boost executive productivity. Firms based in places where it takes a long time to commute are more likely to give the boss a chauffeured limousine. Firms located far from large airports are likelier to lay on a corporate jet.

In other words, executive perks seem to be set with shareholder interests in mind, which is inconsistent with the possibility that managerial power offers a unified field theory of executive compensation. Additional support for that proposition is provided by a recent analysis of a number of practices criticized by Bebchuk and Fried, including perquisites, corporate loans, and encouragement of conspicuous consumption by top management, by Todd Henderson and James Spindler. In brief, they hypothesize that firms seek to discourage top employees from saving so as to avoid the final period problem that arises when such employees accumulate sufficient wealth to fund a luxurious retirement. Reduced savings by such employees encourages them to seek continued employment, which vitiates the final period problem and provides ongoing incentives against shirking. By encouraging current consumption, the oft-decried practices of providing top employees with munificent perks and loans in fact maximize the joint welfare of managers and shareholders.

It would be easy to poke fun at this particular perk. If the analysis in my paper is correct, however, it's not as obvious that it is inconsistent with shareholder interests as the Journal and Caron seem to assume.