We’ve all heard the parable of the blind men & the elephant. Everyone is convinced they know The Truth based on their different perspectives. This Meridian memo reminded me that it’s kinda the same thing when it comes to perks. The memo points out that there are several lenses through which to consider this element of compensation:
– Companies: Value perks that make executives more productive, less distracted, healthier and/or safer. These are the predominant objectives for most Committees when adopting perquisites.
– Investors/Shareholders: Are generally not opposed to perquisites provided that they are not excessive, are within market norms and demonstrate a legitimate business purpose.
– Proxy Advisors: May view perquisites as a poor pay practice if they are “excessive.” Examples include tax gross-ups and “excessive” company plan and automobile use. Both ISS and Glass Lewis have published research on executive perquisites.
– Executives: May view perquisites as more valuable than a similar amount of cash because they facilitate material assistance in managing complex professional and personal responsibilities. Among the most common are financial planning assistance, company car, personal use of company plan and/or executive physicals.
The memo suggests key questions for comp committees to ask when considering perquisites with these perspectives in mind. It also covers two other elements of compensation that may be overlooked or misunderstood – retirement & severance benefits.
At our upcoming “Proxy Disclosure & 22nd Annual Executive Compensation Conferences,” we’ll be discussing a perk that’s been on everyone’s mind this year – executive security – as well as other key issues in structuring short-term and long-term incentives and in executive compensation disclosures. The Conferences are happening in Las Vegas on October 21st & 22nd – it’s not too late to register! You can do that by signing up online or by reaching out to our team at info@ccrcorp.com or 1.800.737.1271. Here’s the full agenda – full of practical insights to help you as you head into year-end and the 2026 proxy season.
– Liz Dunshee
One of the issues raised by some comments on the SEC’s executive compensation disclosure rules is that the current tables mix together target and earned compensation and show values that differ from what executives actually take home as pay. For example, for stock options, awards are reported at their grant date fair value but are valuable to the executives only if the stock price increases. This Pay Governance memo gives one of the clearest descriptions I’ve seen of how the accounting value of stock options differs from the in-the-money compensatory value, and why that matters:
Stock option accounting rules require companies to determine the fair value of stock-based compensation awards at the date of grant, which are significant and irreversible. This requires an option-pricing model, such as the Black-Scholes-Merton (Black-Scholes) model or a lattice (Binomial) model, that factors the exercise price, stock price volatility, expected term, dividend yield, and risk-free interest rate at the time of grant to estimate an economic value of the award.
However, this accounting value differs significantly from the in-the-money value of options, which is zero at the time of grant. This can be confusing to Compensation Committees, HR leaders, and recipients, as the grants are set and disclosed in the proxy’s Summary Compensation Table at their accounting value. In some cases, option awards expire without ever being in-the-money. However, in most cases, option grants are exercised after vesting at a higher stock price, which can yield greater in-the-money value than the accounting value.
The valuation models can affect decisions. The memo continues:
When companies grant stock options, they typically utilize the accounting value to calculate a number of options that would be equivalent to a grant of a full-value award, such as a time-based restricted stock unit (RSU). For example, if the accounting value of an option was $5 versus the stock price of $20, the company would grant four options compared to one full value award.
This creates more leverage in potential values, which has yielded significant value for many organizations as the S&P 500 has grown ~600%, a compound annual growth rate of ~14% over the 2010-to-2024 time period covered in the analysis. However, there is still a population of companies where such leverage has not paid off with the option being underwater and having zero value while an RSU would have kept some value.
While many companies have moved away from stock options, they’re still in play. Pay Governance analyzed option grants by S&P 500 companies from 2010 to 2019, finding that around 65% of the options (1,409) ended up with an in-the-money present value that was above the accounting value. The memo also delves into trends by industry.
– Liz Dunshee