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Given the recent spotlight that the SEC has placed on perk disclosures, compensation committees need to ask management for updated reports on executive perquisites and ensure that the proper internal controls and data gathering mechanisms are in place to monitor these benefits, sources said.
Ultimately, if a company takes remedial actions quickly, it will look better in the eyes of the SEC, sources said. But the board must make sure that executives aren’t hiding perks in the first place. “The SEC has taken a hard position to go after companies that don’t report,” said Deb Lifshey, managing director in the New York office at executive compensation consulting firm Pearl Meyer. “Some of these cases that failed to report didn’t involve a whole lot of money, but the SEC doesn’t want companies to get away with it. Failure to disclose will cost a lot more money than the perks are worth.”
Lifshey said the important thing to take away from these recent actions is the definition of “integral” to the business.
“There’s a million shades of gray on what’s integral,” Lifshey said. “There are a lot of layers. It’s very complex, and companies have been getting caught up in it.” Lifshey said the SEC was largely “radio silent” on perquisites after its 2006 rule-making. When the commission announced its settlement in 2018 with Dow Chemical, however, experts perked up, as the order gave companies “a little more color” on what the SEC means by integrally and directly related to the business.
“I think what’s been happening … particularly with Covid, there might be some temptation to use the corporate aircraft, which gets the most attention for more personal benefits,” Lifshey said.
“Proper internal controls are the number one thing you need to have in place,” Lifshey said. “The entire compensation committee needs to be aware that there should be robust controls and policies, and the board needs to be clear about what executive officers can and cannot do.”
Additionally, Lifshey said it’s important that management trains employees, including in the HR function, as well as internal and external lawyers who work on the proxy. Companies need to have “a good audit trail” for perk spending, how the company defines a perk, the value of the perk and perk policies, she said.
“Most companies are getting rid of perks,” Lifshey said. “You have to maintain a certain level to be competitive and attract execs from time to time, but the one most focused on and/or abused is airline perks, so it’s good to have clarity around that.”
“Companies should be aware that [the SEC is] going after companies not for giant, egregious, billions of dollars they failed to report but failure to report things that are in the low six figures,”Lifshey said. “It’s not worth it to get into enforcement actions to hide things like that.”