Do Corporate Jets Ground Profits?

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expert perspective telescopeExpert Perspective by Grahall’s OmniMedia Editorial Board

In his October 26, 2009 article for the Wall Street Journal “Curbing Executive Pay, But Not the Perks”  Brett Arends concludes that “a government crackdown on executive compensation may not be the disaster for American capitalism that many fear. However, if [Congress] want to do investors a real favor, they should go after the perks as well as the pay.”

Public uproar over ongoing excesses in executive compensation will surely invoke heightened scrutiny of executive perquisites and retirement plans (see this week’s Grahall The Haves vs. The Have Nots).

Stunning evidence that the most lavish and potentially inflammatory of perquisites – the use of the corporate jet – is correlated with a dramatic decrease in financial performance, is noted in the Journal article.  Arends cites results of a study conducted by NYU’s David Yermack that concludes: a “CEOs’ personal use of company aircraft is associated with severe and significant under-performance of their employers’ stocks.  Firms that permit personal aircraft use by the CEO under-perform market benchmarks by about 4 percent or 400 basis point per year, after controlling for a standard range of risk, size and other factors.”  WOW!

In case you’re wondering, over 10 years, a 4% decline in annual performance from 8% to 4% costs would reduce a shareholder’s gain from 116% to 48%.  Increase the time period to 20 years and the damage worsens from 366% to 119%!!!  That could certainly get the “pitchfork” crowd in a tizzy!

But the real question is this: would corporate performance actually improve dramatically if plane usage was eliminated?   Perhaps the company jet isn’t merely a correlator, but a corroborator as well?  If so, that would suggest that the CEOs who have personal use of a corporate jet have manifested an entitlement mentality that results in poor performance (jet use corroborates poor performance) or do jets cause poor stock performance (jet use correlates to poor performance)? 

Wouldn’t it be nice if use of a  corporate jet could predict performance, or even better, alter performance?  If only life worked like that! You say it corroborates, I say it correlates, you say tomato, I say “tomahto” – what’s our point?  There is nothing wrong with any form of pay, direct or indirect, cash or perk so long as it makes business sense, is transparent, and is properly communicated, and that includes the corporate jet. 

No two organizations are alike, so no two should have identical programs.  Get the money right, the mix right and the message right and you’ll be able to withstand  the firestorm of anger over these “unseemly luxuries” while your competitors wilt.  As we have said before Boards,  be prepared to clearly address questions by regulators, shareholders, the media and the public about how these programs support the overarching business objectives.  We advise Boards to take a careful look at all forms of compensation – including perks – and ensure that there is a sound business reason for them and then be transparent to your owners (the shareholders) about the “what” and the “why”.  

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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