Article

Personal protection: perk or necessity?

Published Date
Dec 12 2024

The shocking murder of Brian Thompson, the chief executive officer of UnitedHealthcare, while walking to an investor meeting in New York City on December 4, 2024, has caused many boards of directors and executive teams to reevaluate the security arrangements, if any, provided to their senior leaders.

Threats to the safety and wellbeing of business leaders are no longer limited to high-profile entrepreneurs or Wall Street leaders. Where personal security benefits such as bodyguards, home security systems, secure modes of transportation and personal emergency response services may once have been considered by some critics as excessive or unnecessary “perks,” current events indicate that a more nuanced and targeted approach to executive safety may be necessary. 

Background 

Perquisites and other personal benefits, or “perks,” are one of the topics most commonly cited as “inappropriate” or “excessive” by critics of executive compensation practices. According to SEC guidance, an item is a perk 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 for the convenience of the company, unless it is generally available on a nondiscriminatory basis to all employees. In contrast, an item is not a perk if it is “directly and integrally related to the performance of an executive’s duties.” 

Shareholders and proxy advisory firms, and even employees, have historically criticized executive perks, not necessarily because their value is material, but because a company’s perks are viewed as a reflection of the company’s values, culture, and corporate governance practices. Additionally, perks have a tendency to generate headlines, and SEC enforcement actions, at much higher rates than other aspects of executive compensation. Shareholders may reasonably question why the already most highly-compensated employees at a company need the company to provide them with, in an extreme example from a different time, fresh flowers, home cleaning services, a million-dollar birthday party for their spouse, or a gold-plated waste basket.1

Proxy advisory firms, including Glass Lewis and ISS, analyze perquisites as a part of their qualitative analyses of a company’s executive compensation program and practices and weigh their assessment of whether a perk is inappropriate or excessive alongside other factors when deciding whether to issue an adverse “say-on-pay” vote recommendation. A 2024 survey conducted by Glass Lewis to inform updates to its policy guidelines found that 55.8% of investors view perquisites as indicative of concerns around broader pay practices.2 In 2023, 19 of 42, and in 2024, 13 of 34, S&P 500 companies that received a negative say-on-pay vote recommendation from ISS were criticized by ISS for providing excessive perquisites.3 ISS specifically mentioned security services and aircraft use in six and seven of these cases, respectively.

Shifting towards targeted business purposes

In light of continued shareholder and proxy advisory firm criticism of perks, companies have, over the years, retreated from providing perks that risk triggering a cover story in favor of executive benefit arrangements targeted at addressing specific risks, achieving articulated business purposes, and satisfying overall compensation program objectives. Even as the number of companies that have determined it is appropriate to provide some perks to their executive officers has remained relatively consistent, the number and types of perks have narrowed.

In our 2023 Corporate Governance & Executive Compensation Survey (the “Survey”), we reviewed the executive compensation practices of 100 of the largest U.S. public companies and found that 96 of the surveyed companies provided some executive perks,4 a trend that has remained relatively consistent since we first collected data in 2004. In its 2024 survey of executive perquisites at S&P 500 companies, Willis Towers Watson reported that over 80% of S&P 500 companies offered some disclosable perks to their CEOs and other named executive officers.5

A review of Survey results over the last 20 years reveals that between 2004 and 2023, companies offering club memberships decreased by 94%, companies offering company products or services greater than those generally available on a non-discriminatory basis to all company employees decreased by 43%, companies offering tax planning or preparation services decreased by 30% and companies offering executive life or disability benefits decreased by 30%. In contrast, the number of companies permitting or requiring personal use of a corporate jet for personal travel and the number of companies offering personal or home security services to at least one executive officer both decreased by only 4%.

Personal security arrangements

It can be argued that the safety of a company’s most senior leaders is integrally and directly related to the company’s business needs and the performance of the leaders’ duties. However, the SEC nevertheless provides that personal security measures are disclosable perks. In the adopting release for the SEC’s 2006 executive compensation disclosure reforms, the SEC stated that “a company’s decision to provide an item of personal benefit for security purposes does not affect its characterization as a perquisite or personal benefit.”6 As an illustration of this reporting principle, the SEC pointed to a company policy that for security purposes, an executive (or an executive and her family) must use company aircraft or other company means of travel for personal travel or must use company or company-provided property for vacations. In the SEC’s view, this policy would not affect the conclusion that the personal travel benefit is a perquisite. 

Many companies disagree with the SEC’s perspective on the personal nature of executive security arrangements. Providing personal security services to executive officers can be a valuable and effective way for companies to protect their “key persons” and their business interests. Executive security is an integral component of any comprehensive corporate risk management program. As a result, providing personal security arrangements may not only constitute a reasonable business expense, but can also in many instances be in the best interests of a company and its stockholders. 

When implementing or updating their security programs, companies frequently commission a third-party, independent security study to document the legitimate security concerns of the business. The results of this study will not impact the analysis of whether the security benefits are integrally and directly related to the executive’s duties, but they can help justify the nature and cost of the benefits when communicating with the market as well as secure beneficial tax treatment for the company and its executives.7

Willis Towers Watson’s survey found that 24% of S&P 500 companies provided personal security benefits to their CEO and 16% to provided them to other named executive officers. Our Survey found that 50% of the top 100 companies provided personal security benefits to at least one named executive officer, with eight of the top 10 companies providing this benefit.8 According to an analysis from ISS-Corporate, in 2019, about 12% of S&P 500 companies paid for the home security of executives, which increased to around 16% in 2023.9 

From the perspective of these companies, one could argue that personal security arrangements are integrally and directly related to the performance of their executives’ duties because they are necessary to ensure the executive can travel and perform their responsibilities safely. In a recent proxy statement, one of the ten largest listed companies disclosed USD2.2 million in residential security and consultation provided to its CEO and stated that it “believe[s] these arrangements and costs are reasonable, appropriate, necessary and in the best interests of [the company] and its stockholders, as they enable [its CEO] to focus on his duties to the Company while reducing security threats, and therefore, mitigate risks to [its] business.” 

Some companies also contend that personal security arrangements should be considered integrally and directly related to an executive’s duties because the source of the security threats faced by the executive is their role and duties to the company—their notoriety as an executive of the company or the imputation of corporate behavior onto the executive make them a target. One tech company that disclosed in its most recent proxy statement nine figures in costs related to the personal security of its CEO, as well as a 10 figure allowance to cover additional costs associated with the security of its CEO and his family, explains that it believes its CEO’s role puts him in a unique position as “he is synonymous with [the company] and, as a result, negative sentiment regarding our company is directly associated with, and often transferred to [him].” The company further explained that it considers these arrangements to be a key pillar of its compensation program for its CEO as he receives only USD1 in annual salary and no bonus payments, equity awards or other incentives.

Our take

Unfortunately, it often takes tragedy to spur changes in policies and conduct. Current events have forced companies that did not already provide personal security services to their executive officers to reevaluate their approach, and companies that already provide some security services to their executives are closely reviewing and updating their programs. When undertaking these reviews, boards of directors and senior business leaders must contend with shareholders’ and proxy advisory firms’ historically negative view of executive perks, as well as compensation disclosure requirements at odds with their own characterization of the benefit. 

Recent trends show that public companies have, largely, rebalanced their perquisite offerings to benefits targeted at specific business needs. Particularly as the world has become more interconnected—and executives who previously may have lacked any mainstream notoriety are now easily identified and discussed online—and more dangerous, this more nuanced approach to perks offerings should be viewed not only as justifiable from a business perspective but expected by the market. 

Companies implementing or updating executive security policies should seek to document their justifications, including by considering commissioning a security study. Companies should also engage with their key shareholders early in the process to explain the company’s rationale for the new or updated offerings. Additionally, companies should carefully craft their executive compensation disclosures to emphasize the business case for the benefits being offered and to explain how they fit within the company’s overall compensation program’s philosophy and objectives.

Footnotes

1. See, e.g., Securities and Exchange Commission v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. Belnick, Civil Action No. 02 CV 7312.

2. Policy Survey 2024 

3. 2024 Proxy Season Review: Compensation related matters.

4. 2024 Shearman & Sterling Corporate Governance survey .

5. Executive pay memo, North America.

6. SEC report on Executive Compensation and Related Person Disclosure.

7. Commissioning a security study also provides certain tax advantages. Personal security services are generally a taxable fringe benefit to employees on which the employee will owe income taxes and from which the employer must withhold payroll taxes. However, Internal Revenue Service guidance provides that if a company establishes an “overall security program,” employees, including executive officers, may receive certain otherwise taxable personal benefits on a tax-free basis. Additionally, the company may be able to take a deduction for certain secure travel-related benefits. An “overall security program” will be deemed to exist if (1) the company provides a 24/7 security program or (2) the company conducts an “independent security study.”

8.UnitedHealth Group, the parent of UnitedHealthcare, is one of the two companies in the top ten that did not disclose whether it provides security benefits to its named executive officers.

9.Agenda article 

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