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SEC Release Provides Guidance On Perquisites And Personal Benefits

The SEC's proposed amendments to the disclosure requirements for executive compensation include interpretive guidance on items that constitute a perquisite or other personal benefit (Rel. No. 33-8655, January 27, 2006). The release notes that questions are frequently raised as to what perquisites or other personal benefits must be disclosed. The SEC has avoided defining these items out of concern that a definition would become outdated or that it would provide an incentive to circumvent any bright line definition. The guidance in the proposing release outlines the factors that should be considered in determining whether an item is a perquisite or a personal benefit.

Under the SEC's proposed amendments, perquisites and other benefits would have to be disclosed in an "All Other Compensation" column of the summary compensation table. Perquisites and other personal benefits valued at $10,000 or more would be disclosed in footnotes. The SEC believes the current rule permits the omission of too much information that is material to investors. Each perquisite must be described in a manner that clearly identifies the nature of the benefit received. The release explains that it would not be sufficient to generally characterize as travel and entertainment such company-financed benefits as clothing, jewelry, art, theater tickets or housekeeping services.

The perquisites and personal benefits would be disclosed for both named executive officers and directors. The SEC warns against artificially narrow definitions that are aimed at avoiding disclosure. Under the staff guidance, an item will not be deemed a perquisite or a personal benefit if it is integrally and directly related to the performance of the executive's duties. An item would be deemed a perquisite or a personal benefit if it provides a direct or indirect benefit that has a personal aspect, without regard to whether it is provided for a business reason or for the convenience of the company, unless it is generally available on a nondiscriminatory basis to all employees. 

The release explains that the concept of a benefit that is "integrally and directly related" to job performance is a narrow one. For example, it may extend to office space at a company business location, a reserved parking space that is closer to business facilities or additional clerical or secretarial services for company matters. It would not extend to the use of company-provided aircraft or yachts, commuter transportation services, clerical or secretarial services for personal matters or investment management services. The release notes that a company's determination that an expense is an ordinary or necessary business expense for tax or other purposes, or one that is for the benefit or convenience of the company, is not applicable to whether the expense provides a perquisite or other personal benefit for disclosure purposes.

Examples of items requiring disclosure under Item 402 would include club memberships that are not used exclusively for business entertainment, personal financial or tax advice, personal travel in vehicles owned or leased by the company, personal use of property owned or leased by the company, housing or other living expenses, security provided at a personal residence or during personal travel, and discounts on company products or services that are not generally available to employees on a nondiscriminatory basis.

If a company has a policy that an executive must use company aircraft or other means of transportation for security purposes during personal travel, it does not change the conclusion that the item is a perquisite or a personal benefit, according to the release. However, business-related travel, business entertainment and security during business travel would not be considered a perquisite or a personal benefit.

The release responds to examples that have been submitted by legal advisers seeking bright line guidance on the definition of perquisites, such as a larger office or a higher level of secretarial service than other employees. These issues are integrally and directly related to the executive's job, according to the release, so would not be considered perquisites or personal benefits. However, an additional secretary whose duties are not directly related to the executive's job performance would be a perquisite or a personal benefit.

In connection with its proposed disclosure on perquisites and personal benefits, the SEC is asking for comments on whether $10,000 is the appropriate level for disclosing the total or whether any minimum should apply. The SEC also asks whether all perquisites should be separately identified once the $10,000 aggregate threshold is exceeded. Comments are also sought on how to value perquisites and other personal benefits, such as whether the value should be based on the retail price or on the retail price of a commercially available equivalent. The SEC also asks whether perquisites and other personal benefits should be defined in Item 402 or whether any of its interpretive guidance should be codified.