Executive Perks Vs. Base Pay

Anytime you turn on the TV, listen to the radio or surf the web, Executive Compensation is a subject that is continually being examined. Not only stockholders but normal citizens are concerned with the amount of compensation public companies executives are paid. Surf the web for a few minutes and you can find what top CEO’s are being paid, but is that the extent of their compensation? We all know executives are being paid a huge salary, but the compensation doesn’t stop there. Perquisites are perks, or “benefits provided to executives above and beyond regular income” (Liu, Yin 1). Perquisites are things like personal aircraft, living arrangements, chauffeured limousines, memberships and other lavish items. Companies provide these perks to “retain the best leaders and allow executives to operate more efficiently” (Liu, Yin 1).These perks were originally not disclosed in executive compensation unless it exceeded ten percent of the total annual salary.

Most shareholders are not presented with detailed information on the perquisites available to executives. Since this is the case Harrison Liu and Jennifer Yin completed research “to examine whether there is an association between high and excess compensation and executive perquisites” (Liu, Yin 1). As I read the journal, I was under the impression that most companies would likely pay the CEO a lower annual salary and give them extensive perquisites. Liu and Yin’s research debunks my theory.

Liu and Yin provided three hypotheses:

              “H1: Executive perquisites are positively related to the level of CEO compensation.

            H2: Executive perquisites are positively related to the relative level of CEO compensation.

            H3: Executive perquisites are positively related to firm performance.”

Using comprehensive models, logit models and natural logarithms Liu and Yin examined samples to achieve their conclusions.  Hypothesis 1 was tested by examining “whether the levels of CEO compensation components are higher in firms that offer higher executive perquisites” (Liu, Yin 4). Their results upheld their hypothesis, that there is a positive correlation between executive perquisites and the total amount of executive pay.

Hypothesis 2 was tested using the same numbers as H1 but a different equation. These results claimed that there was not a correlation between a relative CEO’s pay and perquisites.

Hypothesis 3 was also thrown out. Their results showed “firms that offer high perquisites do not have higher accounting and stock performance” (Liu, Yin 8).

 The results of this research make evident the more base salary a CEO is receiving the more perquisites they are offered.  Even though in 2009 the SEC cracked down on the reporting of perquisites, CEO’s will always be held under a microscope when it comes to their compensation.


Source:

Journal of the Academy of Business & Economics; 2011, Vol. 11 Issue 3, p260-268