Another Compensation Scandal in the Works? The Subject this Time: Underreporting of Personal Use of Corporate Jets
By Cydney Posner
A review by The Wall Street Journal of FAA flight records from 2007 to 2010 found that dozens of jets operated by public companies made 30% or more of their trips to or from resort destinations, sometimes more than 50%, often to places where executives own homes.
The high percentage of trips to vacation spots "has stirred doubts among some experts about whether companies are disclosing to shareholders the full amounts spent on personal-jet travel, widely considered the most expensive executive perk." Remember that it was a WSJ report that kicked off the SEC's inquiries into option backdating, and it remains to be seen whether this article will trigger another flood of SEC investigations.
The article reports on a number of instances where the FAA records do not seem to match up with the company's public disclosure. For example, the records for a large computer-storage company that owns five jets -- purportedly for business purposes with only "limited" personal use allowed – show that, in the last four years, the company's jets landed 393 times at three resort locations where the CEO has vacation homes. One of the five jets devoted 46% of its flights going to or from these and other vacation spots over the four years. Fleet-wide, 31% of the flights were to or from resorts. While the company reported the cost to shareholders of the CEO's personal use at $664,079 over the four-year period, the WSJ estimated the cost of flights to or from just the airports near the CEO's homes was closer to $3.1 million. (The article notes that the FAA data reviewed do not disclose the passengers or the purpose of the flights, so it is not always evident whether the flight was business or personal.)
According to the WSJ study, other companies also disclosed "relatively little cost for personal flights in disclosure documents, even as their jets made dozens of trips to resort towns near residences owned by an executive." In 2009, a New York City-based conglomerate reported less than $30,000 on personal flights for its Chairman. The WSJ found that the company's four jets that year spent 220 hours flying to or from locations where the Chairman owns homes and determined that those flights alone would have cost $708,000. In addition, more than half of the flights by the company's four jets from 2007 through 2010 were to or from resort areas, including 739 to spots where executives have houses. The Chairman apparently lists one of his resort homes as an office location in the Jackson Hole WY telephone directory. (Legal commentators cited in the article were split as to whether the SEC has taken a clear position on claiming that a home office in an executive's house is a company location that would allow trips there to be counted as business travel, although both commentator were negative or at least dubious about the possible success of that approach.) Another company, in the cable industry, recently bought a third jet for its fleet at a cost that may have exceeded $40 million. The WSJ reports that the new jet's most frequent destination in its first six months, after its home base, was the island of Martha's Vineyard, where the CEO has a house: "The plane made 24 trips there in that period, mostly in the summer, FAA records show. Starting in October, the jet also began flying to Palm Beach, Fla., where [the CEO] has another home…. By year end, nearly two thirds of the plane's flights were to or from those and six other resort destinations, including Augusta, Ga., Big Sky, Mont., and the Hamptons… Over the full four years, 42% of flights [for all of its private jets] were to or from resort areas…." Similarly, about 55% of flights taken by executives at a large consumer products company were to or from resort locales, including Aspen and Antigua, where the CEO's father lives. The WSJ estimated that those flights would have cost the company $3.7 million, but the company reported only $1.9 million in personal travel, not including undisclosed reimbursements from other executives. <
The SEC has brought some enforcement actions regarding failure to disclose aircraft usage. In one recent case, the SEC accused the company of failing to disclose a number of perks, including payments for its former CEO to live in a Wyoming ski lodge and commute to headquarters by private jet. The company and three executives paid a total of $2.8 million to settle the case. <br> <br>Some commentators argue that it's hard to compartmentalize CEO travel. Some companies contend that their business interests coincide with resort locations where their executives have homes, while other companies have indicated that executives use private jets for efficiency and security reasons. However, the renewed shareholder attention to perks has led many companies to cut back on extravagant perks because they send out the "wrong message." As a result, many companies now require executives to reimburse their employers for their personal-flying costs or have banned the practice altogether. Nevertheless, about 37% of the S&P 500 companies disclosed aircraft perks for their CEOs in recent filings, only a slight decrease from 40% for the prior year.