It’s no
secret that the general public feels the majority of top executives are vastly
overpaid. One aspect many relate to excess executive compensation is executive
perquisites. An executive perquisite is a benefit given to an executive which
is not included in their compensation package. Examples of executive
perquisites are the use of a company automobile or aircraft for personal
reasons, various club memberships, services such as legal, financial, and tax,
and other expenses not related to business matters. But do executive
perquisites really contribute to excess compensation? The article reviewed
attempts to answer the matter using statistical sampling and testing of three hypotheses
to see whether or not executive perquisites really are associated excess
executive compensation.
As
mentioned, the authors developed three hypotheses to test in their search to
find whether executive perquisites are related to excess compensation. The
first hypothesis is that executive perquisites have a positive relationship to
the level of executive compensation. The second hypothesis is that executive
perks have a positive relationship to relative executive compensation. The
difference in the second hypothesis than the first is that it tends to deal
more with the compensation of other executives in the same industry. The third
hypothesis formulated is that executive perquisites have a positive
relationship to the performance of the firm, as is argued by many of the firms
themselves.
The sample
of firms was taken from a list of firms whose sales revenues equaled at least
six billion dollars, as it is expected that these firms will give higher
perquisites. The authors then focused on CEO compensation only, and eliminated
firms with changes in CEOs and firms with missing variables. They then divided
the firms into two categories, perk firms and other firms. They then input various
data including salaries, bonuses, and any other total compensation. Using a
regression model, they then compared the inputs of firms that offered higher
perquisites to those who did not offer so many perks. They also tested relative
pay and perquisites to test the second hypothesis. A separate model was used to
test for the third hypothesis using performance measures.
The
results proved hypothesis one to be correct, and hypotheses two and three were
rejected. The study found that firms with higher CEO compensation also tend to
offer higher perquisites. The average compensation for all firms was $6.3
million total compensation. When separated into perk firm and other firms, perk
firms averaged $12.6 million as opposed to the $4.8 million average of other
firms. It was also shown that there was no difference between perk firms and
other firms in residual values, indicating that CEOs of firms which offer
higher executive perquisites are not overpaid in relation to other CEOs. When
studying the measures of performance such as return on assets and stock returns,
it was shown that there is also no relationship between higher perquisites and
higher performance.
Based
on these results one can conclude that there is no relation between executive perquisites
and excess compensation. The rejection of the second hypothesis tells us that CEOs
who receive compensation in excess to other CEOs do not receive more
perquisites than the others. I believe this article can give executives under
pressure from their shareholders to relinquish some of their perks a sigh of
relief. This study clearly indicated that perquisites offered to executives are
in relation to their total compensation and therefore firms should continue
offering the same perquisites they were before the publishing of this article.
WORKS CITED:
Liu, H., &
Yin, J. (2009). Executive perquisites, excess compensation, and pay for
performance. Journal of Academy of Business
and Economics, 11(3), 260. Retrieved from
http://libproxy.uhcl.edu:5879/global/article/GALE|A272484654/e9ae96da67eddb1bf6347b0bf802f820?u=txshracd2589
I thought it was interesting that neither the transparency of executive perquisites nor the tax consequences of executive perquisites were addressed in the study. These are the two more relevant concerns in my opinion: one from the viewpoint of the investors, and the other from the viewpoint of the government.
ReplyDeleteI liked the article, however it does not mention the stock options which in my opinion is where the CEO's can get most of their pay. Also, 6.3 million dollars does not seem like a lot for a CEO, compare to what you hear the wall street CEO's get paid.
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