• SEC Provides Guidance on Disclosure of Executive Perquisites
  • March 8, 2006
  • Law Firm: Baker, Donelson, Bearman, Caldwell & Berkowitz, PC - Memphis Office
  • Interpretive Guidance with Immediate Impact

    As discussed in our last alert, the Securities and Exchange Commission (the "SEC") released proposed amendments on January 17, 2006 (The "Proposed Rules") that would change the way executive compensation is disclosed in proxy statements, annual reports and registration statements. As part of the Proposed Rules, the SEC offered interpretative guidance for the first time in many years on how corporations should analyze whether items provided to named executive officers and directors actually constitute perquisites. As recent enforcement actions have shown, the SEC has been dissatisfied with the current levels of disclosure.

    The SEC's interpretative guidance regarding perquisites is effective immediately and should be applied to this year's proxy statements and other disclosure documents going forward. Key concepts under this framework are:

    • Integrally and Directly Related: An item is not a perquisite if it is integrally and directly related to the performance of the executive's duties.

    • Personal Benefit: Otherwise, an item is a perquisite if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or the convenience of the company, unless it is generally available to all employees on a non-discriminatory basis.

    The SEC makes it clear that the concept of "integrally and directly related" is a narrow one. Also, the release affirms the position that a company's determination that an expense is "ordinary" or "necessary" for tax purposes is unrelated and inconsequential to assessing whether that company expense represents a perquisite.

    The following chart details specific examples that the SEC has articulated are and are not perquisites.

    Perquisites
    Not a Perquisite
    Club memberships not used exclusively for business entertainment purposes Travel to and from business meetings
    Personal travel otherwise financed by the company Other business travel
    Personal travel using vehicles owned or leased by the company Business entertainment
    Security provided at a personal residence or during personal travel Security during business travel
    Housing and other living expenses, including but not limited to relocation assistance and payments for the executive or director to stay at his or her personal residence Itemized expense accounts the use of which is limited to business purposes
    Personal financial or tax advice
    Commuting expenses, whether or not provided for the company's convenience or benefit
    Discounts on the company's products or services

    Possible Future Impact of Proposed Rules

    The Proposed Rules recommend lowering the threshold aggregate value for the disclosure of perquisites. Under the current regime, perquisites need not be disclosed so long as they do not total $50,000 or 10% of the total annual salary and bonus of the executive officer. In addition, only perquisites that represent 25% of all the perquisites an executive officer receives must be itemized. The proposed changes require that the company disclose perquisites if they total $10,000 or more, and that all these be itemized by way of footnote. Furthermore, the value of the perquisite must be disclosed if it individually exceeds $25,000 or 10% of the total perquisites received. Finally, itemized disclosures must be sufficiently specific, which, for example, prohibits the categorization of theater tickets, jewelry, clothing, and artwork as "travel and entertainment."

    Additionally, the proposal includes a requirement that value determinations of perquisites be calculated according to the incremental cost (which is the actual cost to the company of providing the item). For example, with regard to valuing personal use of corporate aircraft, the previously used Standard Industry Fare Level is expressly prohibited.

    Companies should familiarize themselves with the proposed disclosure requirements so that, looking forward to the 2007 proxy season, their decisions regarding executive compensation will allow them to paint a clear picture with which stockholders will be comfortable.