NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Perks Really Managerial Excess?

"Perks are a means to enhance executive productivity. The narrow implication of this finding is that a blanket indictment of the use of perks is unwarranted."

The business press frequently reports on lavish executive compensation, particularly the many non-salary perks that CEOs and other titans of industry enjoy. Often, such perks are portrayed as wasteful corporate spending that hurts shareholders and contributes little to the bottom line. But is this interpretation warranted? In Are Perks Purely Managerial Excess? (NBER Working Paper No. 10494), authors Raghuram Rajan and Julie Wulf explore the evidence and offer an alternative explanation: corporate perks may simply be a way to enhance managerial productivity.

Rajan and Wulf define executive perks as non-monetary compensation offered to select employees of a corporation; they include non-essential items such as use of corporate jets or club memberships. Traditionally, financial economists have regarded perks as "a way for managers to misappropriate some of the surplus the firm generates," explain the authors, referring to this as the "private benefits" explanation of executive perks. Managers can get away with such behavior because perks are often unknown to outsiders and underreported to shareholders. In this view, perks would be especially prevalent within mature firms with low growth prospects (and thus few investment opportunities) and with substantial free cash flow (and thus less need to seek external financing from discerning investors). Perks also would be more prevalent in firms with less rigorous outside monitoring and corporate governance.

Alternatively, the authors posit that firms may benefit from offering perks more than individual managers benefit from receiving them. For example, an executive who arrives fresh and well rested on a first-class trans-Atlantic flight may be better equipped to negotiate a major deal than an executive who dealt with the hassles and cramped accommodations of flying coach. Perks could enhance worker productivity in other ways, too. Executive dining rooms keep high-level managers in the office rather than having them waste time at outside lunches; they also may foster more chance encounters and synergies between executives of different divisions.

To assess the validity of these competing views, Rajan and Wulf examine data on more than 300 publicly traded U.S. firms between 1986 and 1999, spanning a number of industries. More than 75 percent of the firms were listed in the Fortune 500 for at least one year of the survey period. The data include compensation information for top executives and several positions down in the corporate hierarchy.

Rajan and Wulf find that CEOs have access to the corporate jet in 66 percent of the firm-years, receive chauffer services in 38 percent of total firm-years, and enjoy country club memberships in 47 percent of the firm-years. For division managers, by contrast, the figures are 30, 6, and 28 percent, respectively. The authors find that higher paying firms overall are more likely to offer perks to CEOs. Firms in the petroleum refining industry tend to offer the most perks, while computers and machinery companies offer the fewest perks. Rajan and Wulf also find that older and more hierarchical firms tend to offer more perks, consistent with the notion that perks are often inertial, and that firms may use perks to affirm status differences among employees and enhance CEO authority.

However, the authors find mixed evidence for the "private benefits" explanation for executive perks. For example, as noted earlier, perks should be greatest in firms that both generate substantial free cash flow and face few profitable investment opportunities. But Rajan and Wulf find that high-growth firms generating low cash flow are actually 11.3 percent more likely to offer CEOs use of the company plane. Similarly, Rajan and Wulf find no direct relationship between stronger or weaker corporate governance and access to corporate jets.

By contrast, the authors find ample support in the data for the productivity view of managerial perks. For example, timesaving perks should be offered to executives who manage larger business units and whose decisions affect more people on the margin. Indeed, Rajan and Wulf find that managers operating larger firms receive additional perks. Also, the authors suggest that the use of the company jet may be more efficient for firms located far from airports compared to those in close proximity to airline hubs, which are more easily accessible in large urban areas. Indeed, they find that firms headquartered in more populated areas are less likely to operate a company plane, and that CEOs working in headquarters located in close proximity to larger airports are less likely to enjoy access to corporate jets. Finally, travel-related perks should be offered to executives who face greater travel demands. Consistent with this, the authors find that firms with geographically-dispersed operations that are far from bus y airports are more likely to offer jet access while those with concentrated operations close to airport hubs are less likely.

Rajan and Wulf also examine chauffer service perks and find more evidence to support the productivity explanation. Firms located in more populated areas are more likely to offer chauffer services to CEOs, so they can be more productive during their commutes. Similarly, CEOs that work in counties with longer median commute times are more likely to have access to chauffer services.

"Overall," the authors conclude, "we have found mixed support for the private benefits explanation." Instead, they have identified "more compelling and robust evidence" supporting other explanations, especially that perks are a means to enhance executive productivity. The "narrow implication of this finding," they assert, "is that a blanket indictment of the use of perks is unwarranted." More broadly, they believe that examining non-monetary compensation can unearth very interesting and research-worthy aspects of business and organizational design.

-- Carlos Lozada


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