Posted 4/26/2005 11:25 PM Updated 4/27/2005 1:02 PM
The corporate jet: Necessity or ultimate executive toy?
By Gary Strauss, USA TODAY
When it comes to one choice perk, the sky's the limit for many CEOs.
Personal use of the corporate jet is soaring among Corporate America's elite. More than 250 CEOs racked up personal flight time worth at least $50,000 in 2004; more than 100 CEOs and senior managers ran up tabs of $100,000 or more, according to a USA TODAY analysis of Securities and Exchange Commission corporate filings.
The ranks of CEOs with extensive personal use of company planes have surged since 2002, when 140 had flight tabs of $50,000 or more and just 33 had $100,000 or more.
Virtually all CEOs' personal flight costs were paid by their companies. Since the IRS values personal flight time as taxable income, many companies also covered CEOs' flight-related taxes. For example, eBay spent $229,145 for CEO Meg Whitman's personal plane use in 2004 and what the online auctioneer characterized as a $128,390 "bonus" to cover her taxes on the imputed income.
The swelling numbers reflect heightened post-Sept. 11 security concerns, a thriving business-jet market, a tax code that allowed executives to fly at ultralow prices and companies to claim tax breaks, and more broadly, growing acceptance by corporate boards that personal flight time is a perk necessary to keep CEOs happy. Big users:
• Leucadia National's Joe Steinberg, whose personal flights cost the diversified holding company $743,556 in 2004, 18% more than his $630,429 salary. Leucadia and Steinberg, who ran up $616,100 in 2003 flight costs, declined comment.
• Morgan Stanley CEO Philip Purcell, required by company policy to use corporate aircraft for personal travel "whenever feasible," ran up $467,000 in 2004 personal flight costs. That's on top of $21.9 million in compensation and an $18 million stock-option gain. The company declined comment.
• TXU's John Wilder received $560,982 in personal flight time for "security and safety purposes," according to the utility's proxy. That's on top of Wilder's more than $53 million in salary, bonus, stock and incentive payments. Wilder uses the plane to commute from TXU's Dallas office to his New Orleans home, "part of a negotiated contract when we hired him a year ago," says spokesman Chris Schein.
Corporate ownership and leases have jumped nearly 70% since the early 1990s. Nearly 16,000 companies operate their own aircraft; thousands more have fractional ownership through providers such as NetJets. As business use spreads and commercial flights grow more arduous, many CEOs found the convenience and opulence addictive.
As a security measure or perk, companies justify their CEOs' personal use of corporate planes, saying the convenience, protection and hassle-free travel private aircraft provide is well worth the corporate cost. Georgia-Pacific, for example, spent $176,353 on 2004 personal flight time for executives but says it's a fringe benefit needed "to remain competitive in the market for a high-quality management team," according to its proxy.
TXU notes that since Wilder was hired in February 2004, its market value has climbed to about $20 billion from $6.2 billion — a fraction of his flight costs.
Returns at other companies that permit personal plane use haven't been as robust. New York University finance professor David Yermack tracked Fortune 500 firms that paid for CEOs' personal flight time from 1992-2002. In his study Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns, he found they lagged behind the benchmark Standard & Poor's 500 by 4 percentage points a year.
"It's clear companies giving this perk perform poorly, and there's no reason to think that's changed," he says. "There may be a justifiable business purpose, but there are lots of companies that wouldn't have bought planes in the first place if the CEO didn't have his eye on it for the toy factor."
Setting a tone
With executive compensation skyrocketing, corporate governance experts say shareholders shouldn't foot the bills. "When setting the tone, boards need to ensure there isn't one playbook for executives and another for the rank and file," says Eleanor Bloxham of The Value Alliance. "Why pay for perks CEOs could easily buy for themselves?"
USA TODAY tried posing that question to more than two dozen companies. None would comment. Even CEOs who reimburse employers for flight costs, such as Level 3 Communications' James Crowe — who repaid $188,474 in 2004 — declined to talk.
After reports of heavy personal plane use among disgraced CEOs and negative PR heaped upon former General Electric CEO Jack Welch over his post-retirement use of company jets, "Culturally, you don't want to send a message to the market, employees or customers that CEOs are treated preferentially," notes compensation specialist Mike Kesner of Deloitte Consulting.
Perception aside, the actual costs of CEOs' personal flights borne by shareholders are much greater.
Few companies disclose the type of aircraft CEOs use, hours of flight time, destinations or who else, such as family members, are also on board. The SEC requires companies only to report the additional costs as CEO imputed income. The value typically had been tied to comparable first-class commercial airfares, a formula that deeply discounted actual flight costs and excludes broader expenses, such as aircraft costs, pilots' salaries and maintenance.
A 10-hour round-trip New York-Los Angeles first-class ticket on a major airline costs about $1,100. A flight aboard an aircraft that a company shares with others under a fractional-ownership arrangement might cost $5,000 an hour. A comparable trip aboard a privately chartered Gulfstream IV could cost $100,000.
Under a provision of the 2004 American Jobs Creation Act, companies lost the ability to deduct the difference between the imputed income value to CEOs and more accurate costs of their flights, including fuel, crew expenses and landing fees. The IRS hasn't determined what formula it will require companies to use to report more accurate costs. Some firms already account for higher incremental charges, but that methodology "severely understates actual costs," says David Cay Johnston, author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich — and Cheat Everybody Else.
Despite the loss of the tax break and higher reporting costs, most companies aren't likely to rein in personal flight time. "A lot will just absorb the increase as the cost of doing business," says Lou Meiners, head of business adviser Advocate Aircraft Taxation.
Flight time as a perk
Still, some boards are adding flight time as a perk. In February, Hershey directors approved a policy that "encourages" CEO Richard Lenny's personal plane use to "ensure confidentiality of information while traveling and to allow (him) more time to concentrate on the company's business, maximizing efficiency," the confectioner's proxy says.
Last month, Mattel agreed to pay for 60 hours of annual personal flight time — plus related taxes — for CEO Robert Eckert. "This will benefit Mattel and its shareholders by minimizing the disruptions and burdens of Eckert's personal travel," Mattel says.
"The rationale among directors is that they're going to compensate the CEO one way or another," says Mark Borges of Mercer Human Resource Consulting.
Contract negotiator Robert Fields says flight perks will continue to be driven by CEOs. "The board has the final say, but it's usually management that proposes it."
Citing security concerns, some companies have long justified CEOs' personal plane use. Post-Sept. 11 security fears prompted many more to adopt similar policies. But critics say security fears are either overblown or simply an excuse to provide a pricey perk.
"I guess it's a matter of opinion," says Ron Sargent, who flies about 170,000 miles a year — virtually all on commercial flights — as CEO of office-supplier Staples. "It's not like there's a security risk if I'm flying (commercial). Besides, if you're the CEO, you have to set an example. I usually fly coach."
Toilet manufacturer American Standard and gum-maker Wrigley, among others, required CEOs to use corporate planes for all travel before 9/11. A 1999 policy at American Standard "encourages" CEO Fred Poses to use the company's jet "whenever possible," proxy filings say. That has cost American $178,805 since 2002, plus $450,339 for unspecified additional personal security. The company declined to elaborate.
Wrigley's flight policy requiring CEO Bill Wrigley Jr. to use corporate aircraft for all travel was board-approved in the 1980s. Since 2002, Wrigley has received flight time valued at $786,870. "The board determined that such travel arrangements were appropriate and in the best interests of the organization, in terms of efficiency, flexibility and security," says spokesman Chris Perille.
Fast-food chain operator Yum Brands, meat-marketer Hormel, soft-drink giant Coca-Cola and apparel retailer Talbots also cite security concerns requiring that their CEOs use corporate aircraft for all travel. The rationale hits a false note among governance watchdogs. "Security concerns? To make that argument with a straight face is laughable. I wish companies would stop trying," says Patrick McGurn of proxy adviser Institutional Shareholder Services. "When was the last time a commercial plane crashed? This is all about convenience and ego."
The SEC requires only minimal disclosure regarding plane use and other perks, so most companies say almost nothing outside of footnoting costs, let alone explain the rationale in annual proxies. Disclosures are often difficult to find. Shareholders have to wade through 432 pages of Commonwealth Edison's annual report to learn that John Rowe, CEO of its Exelon subsidiary, had $267,000 in 2004 personal flight costs.
Citigroup's proxy says it spent $309,783 for personal "company transportation" for Chairman Sandy Weill, $108,208 for CEO Chuck Prince and $459,153 for executive committee chair Robert Rubin. Citigroup doesn't break out personal expenses for planes or ground transport.
Most companies have no stated policy on personal aircraft use or cap on personal flight time. Among companies that have disclosure policies, plane use — and who picks up the tab — varies.
Hilton CEO Steve Bollenbach has unrestricted access — worth $56,000 last year — but covers his own taxes. Linear Technology's Robert Swanson Jr. gets 35% of the company aircraft's total annual flight time. Ameritrade CEO Joseph Moglia gets $200,000 worth of private flight time a year. Apparel marketer Too permits CEO Michael Rayden $100,000 in annual use. Sprint requires CEO Gary Forsee to use company aircraft for all travel but caps it at 75 hours a year. BMC Software CEO Robert Beauchamp gets 12 personal flights a year.
Flying into retirement
Several CEOs will have access to corporate aircraft long after leaving office. Sunoco is giving Charles Coker 50 hours of annual plane use through 2010 in "recognition of 47 years of service and his continued availability for consulting." He'll reimburse the company for undisclosed "variable" operating costs.
Idex CEO Dennis Williams will get up to $110,000 in annual jet time under a consulting deal that also pays $2.4 million a year for less than one week's service a month.
Former FleetBoston Financial CEO Charles Gifford served just 10 months as Bank of America chairman after a 2004 merger. For providing "periodic consultations," he gets 120 hours of private annual jet use, rights to 60 Boston Red Sox tickets and incentive pay.
Anadarko Petroleum is providing former CEO Robert Allison a lifetime benefit of 200 hours of personal flight time a year.
"Frankly, when your tour of duty ends, there's no justification for perks," says retired Medtronic CEO William George. "If you need to fly, you can afford it on your own."
Few corporate governance experts expect the practice to be grounded anytime soon.
"It's a wonderful way to travel. You become addicted to it," says veteran compensation consultant and Bloomberg News columnist Graef Crystal. "You can understand how much the corporate jet is needed for business, where it maximizes time and efficiency. But having shareholders pay for a CEO's personal use is disgraceful."
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