The Advisors' Blog

We recently completed a study on security spending at some of the largest U.S. companies over the past two years (see this recent WSJ article). Security spending is generally a small-ticket perquisite. However, in some rare cases the disclosed values can be quite high, even running into the million-dollar range. What is most interesting is the wide diversity of spending within the same industry, spending that does not necessarily relate to company size.

Most companies spend nothing, or report very little, on security expense for the CEO. We reviewed proxies for the largest 300 companies, which as of the end of April 2008 totaled 247 filers. Of these companies, 156 (62%) indicated they had no CEO-related security spending. Of the 91 reporting security costs, 60 companies reported spending $10,000 or less. Only 31 companies disclose security spending in excess of $10,000, the threshold for disclosing spending, of which 21 companies spent more than $50,000.

Four companies reported expenditures in excess of $1 million—Oracle, Limited Brands, Amazon, and Dell:

– Oracle disclosed $1.7 security spending on CEO Lawrence Ellison in each of the last two years. The disclosure states that these were security-related expenses for Mr. Ellison’s residences. This is all part of a residential security program for Mr. Ellison which was adopted by the Board of Directors.

– Leslie Wexner at Limited Brands has received $1.25 million in security services in each of the past two years, with no explanation other than “Security Services Paid by the Company”.

– Jeffery Bezos at Amazon has personal security arrangements in addition to security arrangements at business facilities and for business travel with a value of $1.2 million.

– Michel Dell’s disclosure indicates $1.05 million in ”company-paid expenses relating to personal and residential security” as part of a Board-authorized security program.

We believe these vast differences in security amounts typically reflect either a) risk assessments by outside security advisers, b) a CEO’s tenure and c) whether or not a company is involved in a high-risk industry or region. The tax rules may also provide insight as to the disparity in security expenditures. Specifically, Treasury Regulations Section 1.132-5(m) provides that an executive would not include as part of his/her taxable income, expenditures related to security if these expenditures demonstrate a “bona fide business-oriented security concern”, and are part of an “overall security program”, and/or recommendations implemented as from an “Independent Security Study.”

The regulations are explicit that a generalized concern for an employee’s safety is not a bona fide business oriented concern. Examples provided in the regulations that are bona fide security concerns are death or kidnapping threats, as well as recent history of violent terrorist activities. If we assume that the security perquisites listed in our study were not included as part of the executives’ taxable income, it is likely these expenditures were in response to security risks in connection with the executives employment.

Please note that the proxy disclosure does not require or provide whether the perquisite is taxable to the employee. Lastly, if we assume that these expenditures are not includible in the executives’ income, the driving force behind the appropriate level of expenditure is likely to lie with those experts who were engaged by the companies to make such determinations.

– Dave Schmidt, James F. Reda & Associates