CEOs Get Fewer Perks
{For Roll Nos. 4, 12, 24, 34, 50, 60, 68, 76, 86, 94, 104, 112, 124}
New SEC rules requiring companies to disclose perks that cost more than
$10,000 lead to a decline in swanky extras
It may still be good to be king, but increasingly the job is coming with fewer
perks. In its third annual study of fringe benefits for chief executives,
compensation research firm Equilar found that the median values of seven of
the nine major CEO perquisites that it tracks—from persona1 aircraft use to
country club memberships—were down or remained flat from 2006 to 2001.
The prevalence of such swanky extras fell too, with most categories showing
lower rates of occurrence this year.
The decline is an expected result of SEC rules that went into effect last year.
The new rules stipulate that companies disclose perks that cost more than
$10,000, far lower than the previous $50,000 threshold. With a brighter
spotlight on lavish extras that could prove embarrassing to a company, more
boards have been ending or reducing CEO benefits. “For many shareholders,
the presence of excessive perquisites has become an acid test on governance,”
says David Wise, a senior consultant in the compensation practice at
management consulting firm Hay Group.
In addition, more disclosure may explain some of the increases that remain,
such as the prevalence of corporate housing benefıts, says Equilar research
manager Alexander Cwirko-Godycki, which may not have been disclosed
separately in the past. Some companies, especially after the SEC sent letters to
companies last fall asking for more detail on compensation decisions, are
choosing to disclose more than what’s required. Others may be disclosing more
because, due to the timing of their fıscal calendar, this was the fırst year they
were required to fıle under the new regulations.
Beefed-Up Security at Dell
Still, the study, which examines perks for CEOs of the 95 largest public
companies by revenue, did show two increases that ran counter to the overall
trend. Tax payments on perks and benefits—extra cash to make up for taxes
assessed for the imputed income of fringe benefits for CEOs—actually rose in
value this year by 43.6%, from a median of $23,951 in 2006 to $34,396 in 2007.
[These payments are separate from the tax “gross-ups,” as they’re often called,
that some CEOs receive for their severance packages.] That’s surprising,” says
Cwirko-Godycki, especially given how much attention has been paid to this
issue. “Perks have always been a controversial issue; paying the taxes on top of
the perks has been even more so.”
Meanwhile, the median value of personal and home security benefits for CEOs
also increased by 14.4%, from $25,609 to $29,291. But Cwirko-Godycki is
quick to point out that the value would have actually fallen this year had it not
been for one significant outlier: Michael Dell, who received $l,034,750 in
security benefits. [The amount was similar to what Dell earned as chairman the
year before, but he was included in Equilar’s study only after returning as CEO
in early 2007.] In a statement to BusinessWeek, a spokesman for Round Rock,
Texas–based Dell (DELL) says the company does not consider the security
payments a perk, but a business-related expense mandated by the board. The
company also says the amount of security Michael Dell receives is determined
with consideration that he is a recognizable industry leader and public figure
worldwide.
Most perks, however, declined in value or prevalence. The median value of club
memberships dropped most significantly, falling 64% from $11,070 in 2006 to
$3,996 in 2007. Financial planning fees were down 9.2%, from $17,156 to
$15,575. And personal use of aircraft, the perk that most “seems to get under
shareholders’ skin,” says Hay Group’s Wise, also fell. In 2007, the median
outlay for CEOs flying on corporate jets was $109,743, down 9.8% from
$121,676 in 2006.
1. Make a case both for and against executive perks. Do you agree that such
perks should be cut? Why?
2. Do you think paying the taxes on top of the perks is ethical?
3. Would you turn down the perks if you ever become a CEO?
Rewarding Teamwork in the Plains
{For Roll Nos. 6, 14, 26, 42, 52, 62, 70, 80, 88, 96, 106, 114}
In the past, most reward systems have been geared to the individual employee.
However, with the emergence of teams in most of today’s organizations,
systems are being revamped to reward teamwork. A good example is Behlen
Manufacturing Company in Columbus, Nebraska. The 1,100 mostly production
employees are organized into 32 teams. Some of these teams have only a
handful of members, whereas others have as many as 60. Although each
individual receives a relatively low base-pay component, the rest of the
compensation is variable and is determined in a number of different ways,
including how one’s team is performing.
The centerpiece of the manufacturing company’s variable-reward plan is gain
sharing, an increasingly popular form of compensation whereby all members
share a usually fixed percentage of the documented savings or performance gain
accomplished by the team. Behlen employees can earn monthly gain sharing of
up to $1 an hour when their teams meet productivity goals. The CEO explained
this team reward system as follows: “If you’re in a group that makes stock
tanks, for example, from the start of the process to the end of the process, over
all shifts, all month long, if the team achieves certain levels of productivity,
each of its members is rewarded anywhere from 0 cents to $1 an hour for every
hour worked in that area.” Documentation of the gains is based on actual
pounds of products, so that everyone on the team knows exactly how well their
team is doing.
Another part of the company’s variable-reward system involves profit sharing.
Employees receive 20 percent of the profits. In recent years this has resulted in
everyone’s getting a profit-sharing bonus equivalent to three weeks’ salary. Still
another part of the reward package is the employee stock ownership plan. Each
employee receives company stock equal in value to 2 percent of his or her base
salary each year. Senior managers in the company participate in the same
reward system as the workers, receiving the same proportional benefits.
However, in the case of managers, performance is calculated on the gross
margin of their business unit before selling and administrative costs are
deducted.
How well has this company in the middle of the Great Plains performed with
this organizational reward system? In each of the eight years this pay plan has
been in place, performance has exceeded top management’s expectations. In
addition to the $5 million the firm saved because of safety, quality, and
efficiency ideas that were submitted through the teams, the company has
exceeded its profit goals each year. In fact, in the most recent reported year
profits were $1 million greater than expectations. The CEO explained it this
way, “As people focused in on their gain-sharing opportunities—and they’ve
understood their profit-sharing opportunities— we’re seeing positive
productivity improvements in every corner of the plant.”
1. Explain the organizational reward system this firm uses.
2. Although this reward system has obviously been very effective, what more
can be done? What specific recommendations would you make?
3. What if the agricultural economy goes bad and the sales of this agribusiness
company greatly decreases? What will be the impact on the reward system this
company uses, and what would you now recommend?
Different Strokes for Different Folks
{For Roll Nos. 8, 16, 28, 44, 56, 64, 7, 82, 90, 100, 108, 118}
Organizations are finding that the best reward system entails a combination of
money, recognition, and benefits. Money is important, of course, but if a person
earns $50 in incentive pay every month, after a while this monetary reward may
begin to lose some of its power. So financial rewards have to be altered and
different ones offered. The same is true for recognition awards; although people
never suffer from too much recognition, organizations have to be sure awards
are fair, and highly creative organizations often ensure that change is built into
the recognition system. The important thing that many firms have found is that
what is truly rewarding for one person may not have the same impact for
another. In short, there are individual differences when it comes to reward
systems, and there have to be different strokes for different folks. Here are some
representative innovative monetary and recognition rewards that have been
offered by a variety of different enterprises.
• At Busch Gardens in Tampa, the company gives a Pat on the Back Award to
employees who do an outstanding job and also has a copy of the notice of the
award put in the employee’s file.
• At Metro Motors in Montclair, California, the name of the Employee of the
Month is put up on an electronic billboard over the dealership.
• At Colin Service Systems, a janitorial service in White Plains, New York,
coworkers vote for the employees that they feel should be given awards as the
Most Helpful Employee and the Nicest Employee, and executives make the
presentations.
• At the Amway Corporation, on days when some workloads are light, the
department’s employees help out in other departments, and after accumulating
eight hours of such work, employees get a personal thank-you note from the
manager of programs and services.
• At South Carolina Federal financial services in Columbia, the president and
other top managers serve employees lunch or dinner as a reward for a job well
done.
• At the Gunneson Group International, a total-quality consulting firm in
Landing, New Jersey, when an employee refers business that results in a sale,
the individual receives a cash award of 1 to 5 percent of the gross sale,
depending on the value of the new business to the company.
• At Quad Graphics printing company in Pewaukee, Wisconsin, employees are
paid $30 to attend a seminar devoted to quitting smoking, and the company
gives $200 to anyone who quits for a year.
• At the Taylor Corporation, a printing company in North Mankato, Minnesota,
in lieu of year-end bonuses, employees are allowed to make selections from a
merchandise catalog.
1. Why are more and more companies complementing their monetary incentives
with recognition awards in their organizational reward system?
2. How would you rate each of the examples? What are some strengths and
weaknesses of each?
3. If you work for a human resource management consulting firm and are given
the assignment to head up a project team to develop reward systems that would
be appealing to today’s employees, what would you recommend?
Huge Benefits, Little Understanding or Use
{For Roll Nos. 10, 20, 32, 46, 58, 66, 74, 84, 92, 102, 110, 120}
The Velma Company designs and manufactures high-tech communications
equipment. The firm is a worldclass supplier, and its three largest customers are
Fortune 5 0 firms. Velma also has major clients in China and the European
Union. Over the last five years the company’s sales have tripled, and the biggest
challenge it faces is hiring and retaining state-of-the-art people. In particular,
there are two groups that are critical to the company’s success. One is the
design people who are responsible for developing new products that are more
efficient and price competitive than those currently on the market. The other is
the manufacturing people who build the equipment.
In an effort to attract and keep outstanding design people, Velma has a very
attractive benefit package. All of their health insurance premiums and medical
expenses are covered (no copay or deductibles). The company contributes 10
percent of their annual income toward a retirement program, and these funds are
vested within 24 months. So a new design person who is earning $75,000
annually will have $7,500 put into a retirement fund by the company, and the
individual can make additional personal contributions. Each year all designers
are given 100 shares of stock (the current sales price is $22) and an option to
buy another 100 shares (the current stock price is $25 and this option is good for
10 years or as long as the person works for the firm, whichever comes first).
The manufacturing people are on a pay-for performance plan. Each individual is
paid $7 for each unit he or she produces, and the average worker can turn out
three units an hour. There is weekend work for anyone who wants it, but the
rate per unit does not change. In addition, the company gives all of the
manufacturing people free health insurance and covers all medical expenses.
Another benefit is that everyone in the company is eligible for five personal
days a year, and the company will pay for any unused days. Velma also has a
large daycare facility that is free for all employees, and there is a state-of-the-art
wellness center located on the premises.
Last year the company’s turnover was 9 percent, and the firm would like to
reduce it by 50 percent this year. One proposed strategy is to strengthen the
benefits package even more and make it so attractive that no one will want to, or
could afford to, leave. Some top managers privately are concerned that the fırm
is already doing way too much for these employees and are troubled by the fact
that exit interviews with designers who left in the last year indicated that many
of them were unaware of the benefits they were receiving. For example, most of
the designers who have gone elsewhere reported that they were attracted to the
stock offered them, yet they did not exercise the options to buy additional shares
of Velma stock because they were not sure what the financial benefits were to
them. The manufacturing people who left reported that $7 per unit was
acceptable, although a higher rate would have resulted in their remaining with
the fırm. The manufacturing people also liked the stock that the company gave
them, but were somewhat confused about the options they held.
Both groups—designers and manufacturing personnel—seemed pleased with
the contribution that the company made to their retirement program, but most of
them did not put any additional personal contributions into their retirement
fund. When asked why, the majority of them were unaware that this could be
done on a before-tax basis, thus temporarily shielding the contributions from
taxes and making it easier to build a nest egg for the future. Finally, all of those
who left said that they liked the child care benefit, although most of them did
not have young children so they did not use it, and they thought the wellness
center was also a good idea but they were so busy working that they admitted to
never using the facilities.
1. Which benefits did the employees who were leaving seem to best understand
and like?
2. Which benefits did they find confusing or of little value?
3. Based on your answers and other relevant considerations, what
recommendations would you make to Velma’s management regarding how they
can do a better job of using the benefits package in their organizational reward
system?