Corporate Governance

Private Use of Corporate Aircraft: The Case of Sprint

By J. Robert Brown

So Sprint disclosed, as it must, the personal use of corporate aircraft by the CEO and CFO.  The number for the CFO was an eyepopping $609,530.  That's a lot of trips to Palm Springs to play golf.  The board had to approve the practice.  Its justification?

• We provide very few personal benefits and perquisites to our named executive officers. The few personal benefits and perquisites that we do provide are summarized in the footnotes to the Summary Compensation Table below, and consist primarily of non-business use of our corporate aircraft, primarily for our CEO and CFO, and communications equipment installed in residences. The Compensation Committee established an overall security program for Mr. Hesse, our CEO, for our benefit. Under the security program, we currently provide Mr.Hesse with residential security systems and equipment, and he is required to use our aircraft for non-business as well as business travel. Mr.Hesse is permitted to have his family accompany him on the corporate aircraft for business and non-business travel. Mr.Brust, our CFO, has a provision in his employment agreement that allows the personal use of our corporate aircraft, which was part of a comprehensive compensation package negotiated with Mr.Brust. The Compensation Committee determined that this provision was necessary in order to attract Mr. Brust, who had a very specific skill set that we desired, to work for us following his retirement from Eastman Kodak Company, where he gained valuable experience working with a challenged company.

In fairness, Brust got the benefit as part of his negotiations to come to Sprint.  If there really is a market for executive compensation, it exists when an executive officer negotiations his or her initial package, when in general, the bargaining process is arm's length.  Thereafter, increases and subsequent changes are not an open market but often involve a CEO bargaining with his or her own colleagues. 

Nonetheless, this practice illustrates the economics of personal use of corporate aircraft.  Brust could have bargained for $600,000 in additional compensation but he would have paid taxes on the entire amount.  With the corporate aircraft, he gets a $600,000 personal benefit but only pays taxes based on the cost of something like a first class ticket for each flight.

We favor on this Blog a comprehensive approach to the compensation problem.  But the problem of personal use of corporate aircraft may warrant a unique solution.  If executive officers were taxed on the costs to the corporation (so that Brust had to add into gross income $609,530), there would be far less personal use of the corporate aircraft.

Full post as published by The Race to the Bottom on April 10, 2009 (boomark / email).