Perks and Excess: Evidence from the New Executive

Compensation Disclosure Rules*

Yaniv Grinstein** David Weinbaum Nir Yehuda

Johnson Graduate School of Management, Cornell University

September 2008

* We thank David Yermack for helpful comments and discussions, and Adam Dix and JoeSung Yoo for excellent research assistance. All errors remain our responsibility. ** Corresponding author. Address: Johnson Graduate School of Management, Cornell University, 355 Sage Hall, Ithaca, NY 14853-6201. Phone: 607-255-8686. Email: yg33@cornell.edu.

Perks and Excess: Evidence from the New Executive

Compensation Disclosure Rules

Abstract

In December 2006, the Securities and Exchange Commission issued rules requiring enhanced disclosure of perquisites to managers in public U.S. firms. We use this ruling to shed light on the role of perquisites in executive compensation. In a sample of 361 public firms that were subject to the rule, we find that firms responded to the rule by disclosing significantly larger amounts of perks. The level of disclosed perks under the new rule is higher in firms that have fewer growth opportunities and larger amounts of free cash flow. Further, the market reacts negatively to the announcement of these perks, especially in firms that disclose large amounts of perks for the first time. Our results are in line with the argument that perks are an excess that reduces shareholder value.

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1 Introduction

Some firms offer lavish perks to their executives, such as personal use of corporate jets, and

memberships in prestigious clubs. What is the reason for these perks?

Financial economists such as Jensen and Meckling (1976), Grossman and Hart (1980), and

Jensen (1986) argue that such perks are a diversion of corporate resources by management at the

expense of the shareholders and are therefore a manifestation of an agency problem. Others, such

as Fama (1980), argue that perks can be a way to motivate executives to work hard. If firms can

generate incentives more cheaply by providing perks than by giving incentive compensation, then

perks can be a superior way to align managerial incentives with shareholders value.

Testing whether perks are an excess or part of an optimal incentive scheme is difficult,

mainly because, until recently, firms were not required to provide much information about perks

in their financial statements. To obtain such information, studies had to rely on voluntary surveys

(e.g., Rajan and Wulf 2006) or on the required disclosure of particularly large perks, (e.g., Yer-

mack 2006a). The evidence in these studies is mixed. For example, Yermack (2006a) finds that

large expenses of corporate jets for personal use by CEOs is explained by their desire for leisure

and that the market responds negatively to the disclosure of the perk. These findings are consis-

tent with the notion that such perks are an excess. In contrast, Rajan and Wulf (2006), find that

firms give perks to their executives when the costs of providing such perks are low, consistent

with optimality of perks.

In this study we wish to shed new light on the purpose of perks and their effect on share-

holder value. In August 2006, the Securities and Exchange Commission (SEC) adopted new dis-

closure requirements of compensation paid to executive officers of public corporations. The pur-

pose of these new rules was to “..help investors keep an eye on how much of their money is being

paid to the top executives who work for them…”.1 The disclosure rules involved a specific re-

quirement for enhanced disclosure of non-wage perquisites.

We study the effect of the rules on a random sample of 361 firms that belong to the S&P

1500 index. We find a significant effect of the rules on the amounts of disclosed perquisites. After

the rules became effective, the amount of disclosed perquisites to CEOs increased by 166% rela-

tive to previous years. Perhaps not surprisingly, the most significant increase is among small-cap

1 See Executive Compensation and Related Person Disclosure, SEC Release No. 33-8732A (August 29, 2006). Firms were required to adhere to these new rules starting in December 2006.

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firms, where it reached 335%. To ensure that the abnormal increase in perks is not simply the re-

sult of some unobservable shock to CEO compensation to all firms in the sample, we also exam-

ine changes in salary, bonuses, and equity-based compensation to firms in our sample. We do not

find any abnormal change in the disclosed amounts of these compensation components. The new

compensation disclosure rules enacted by the SEC thus resulted in an economically substantial

and statistically significant, increase in the amount of disclosed perquisites.

We find that, under the new disclosure rules, 87% of the firms in our sample give perks to

their top executives. Among the firms in our sample that disclose perquisites, the average value of

perks to the top five executives is $115,000, but reaches as high as $4.8 million. We further find

that perks are not only a large-firm phenomenon, but are also prevalent in small firms. In fact,

relative to their corporate size, CEOs of small firms receive substantially larger perks than CEOs

of large firms.

We perform two series of tests to examine whether the use of perks is driven by agency con-

flicts or whether it is part of an optimal compensation contract. First, we investigate Jensen’s

(1986) hypothesis that diversion of perks at the expense of shareholders is more likely in firms

that have high levels of free cash flows and fewer growth opportunities. Consistent with Jensen’s

prediction, we find a significant negative relation between the firm’s growth opportunities and the

amount of perks, and a significant positive relation between levels of free cash flows and the

amount of perks, after controlling for a host of variables such as performance and size. We further

find that the relative power of the CEO within the top executive team is associated with larger

perk offering to the CEO.

Second, we examine the effect of perk disclosure after the new regulation on stock price. We

find that firms that did not disclose perks before the rules went into effect, and started to disclose

perks for the first time in response to the new disclosure rules, experience a negative and statisti-

cally significant abnormal return of -1.77% in the ten-day window around the filing of the proxy

statement. Moreover, when we rank the firms that disclose perks for the first time into groups

based upon the magnitude of the disclosed perks, we find a monotonic relation between the nega-

tive abnormal return and the level of newly disclosed perks. For example, firms in the top quartile

of newly disclosed perks have a significantly negative abnormal return of -4.79%. Unlike the ab-

normal return associated with newly disclosed perks, we do not find abnormal return in firms that

had disclosed perks even before the rule took effect.

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This study contributes to the existing studies in several ways. First, the requirement for en-

hanced disclosure of perks allows us to get a clearer picture of the types of perks to top execu-

tives, the direct costs of these perks, and the distribution of perks across small and large firms.

Rajan and Wulf (2006) did not have reliable information on the cost of perks, while Yermack

(2006a) focused only on the use of corporate jets. Because of data limitation, both studies had to

focus only on large firms.

Second, with the enhanced disclosure of perks, we find that the free cash flow problem is sig-

nificantly related to the use of perks. This finding stands in contrast to Rajan and Wulf (2006)

who did not find such an association. We believe that there are two main reasons for the differ-

ence in the results. First, because of data limitations, Rajan and Wulf (2006) focused only on

large firms who are industry leaders, and therefore their sample lacked variation in the level of

free cash flow across firms. In contrast, our sample includes both small and large firms. Second,

Rajan and Wulf (2006) could not observe the cost of perks and therefore examined the relation

between free cash flow and the existence of perks. In contrast, the enhanced disclosure of perks

allows us to examine the relation between the free cash flow problem and the costs of these perks.

Third, we provide direct evidence of the negative effect of the disclosure of perks on share-

holder value. This finding is consistent with Yermack (2006a), who also documents a negative

market reaction when firms disclose CEOs’ personal use of the corporate aircraft for the first

time. However, Yermack points that he cannot establish a causal relation between the market re-

action and aircraft use since his findings could have been the outcome of a strategic pattern of

disclosure of bad news that was withheld until the manager consumed large amounts of perks

(Yermack 2006 page 231). The new disclosure rule reduces this endogeneity problem because the

disclosure of new perks can be attributed to the rule rather than to managerial perk-consumption

and disclosure patterns.

Our findings also show that the negative abnormal return is directly related to the size of the

perk. This result is consistent with Rajan and Wulf (2006) who argue that perks are excess only

when they become too large. However, Rajan and Wulf conjectured that cases of large perks are

anecdotal and do not represent a significant part of the data. Our findings suggest that negative

market reaction to the disclosure of perks is more common than Rajan and Wulf anticipate. About

33% of the firms in our sample disclosed perks for the first time after the rule, and of those, the

groups that belonged to the top two quartiles in terms of perk costs (60 firms – about 18% of the

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total sample) had a statistically and economically significant negative abnormal return upon the

announcement of these perks.

Another branch of literature related to our work studies the effect of disclosure rules on firm

policies and shareholder value. Greenstone, Oyer, and Vissing-Jorgenssen (2005) study the man-

datory disclosure requirements of the SEC on small-cap firms and their effect on the level of dis-

closure and firm value. More related to our paper are the studies of Murphy (1996), Pery and

Zenner (2001), and Lo (2003), who all study the effect of the 1992 compensation disclosure re-

quirements on compensation policies and firm value. These studies do not consider the effect of

perks on shareholder value.

Another branch of literature related to this work focuses on compensation disclosure.

Bebchuk and Fried (2003, 2004) point to certain benefits that managers receive that are not dis-

closed to shareholders. They argue that these non-disclosed benefits are a sign of suboptimal di-

version of corporate resources for the benefit of managers at the expense of the firm and its

shareholders. Our finding of an abnormal negative return associated with non-disclosed compen-

sation items is in line with their argument.2

From a policy perspective, our study contributes to the debate on the necessity of the compen-

sation disclosure rule. The adoption of the new disclosure standards by the SEC in 2006 was fore-

shadowed by a number of SEC actions in the years leading up to the proposal to revise executive

compensation disclosure rules. These actions were taken amid several well publicized alleged

abuses by certain corporations and their executives, in response to which institutional shareholder

activists had expressed concern. Our results indicate that the enhanced disclosure rules adopted

by the SEC led to disclosure of information that was material to shareholder value.

The rest of the paper is organized as follows. Section 2 discusses the new SEC disclosure rules

and the main hypotheses. Section 3 describes our data on managerial perquisites. Section 4 re-

ports the effect of the rule on perk disclosure and section 5 reports the tests. Section 6 concludes.

2 See also related models in Dicks (2007) and Kuhnen and Zwiebel (2007).

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2 Disclosure rules, theories, and hypotheses

In this section we discuss the recently enacted changes to the compensation disclosure re-

quirements, outline the competing theories of perks, and develop our main hypotheses.

2.1 The new compensation disclosure rules

On January 27, 2006 the SEC issued proposed amendments to the rules governing the disclo-

sure of executive compensation and other governance matters in filings under the Securities Ex-

change Act of 1934.3 After a comment period of several months, a revised and final version of the

rules was issued on August 29, 2006. These enhanced disclosure requirements are the first sub-

stantial changes since the compensation disclosure amendments of 1992, which required a tabular

formatting of the various compensation components to top executives. The current amendments

to the compensation disclosure rules are intended to provide investors with a “clearer and more

complete picture of the compensation earned by a company’s principal executive officer, princi-

pal financial officer and highest paid executive officers.” All firms must adhere to these new re-

quirements as of December 15, 2006.

An important part of the rules deal with new disclosure requirements of perquisites to execu-

tives. Under the old disclosure requirements, firms had to disclose the total value of items that

were not part of salary, bonus, or incentives in two separate columns of the summary compensa-

tion table (see Figure 1). The first column was “other annual compensation,” which mainly in-

cluded annual perks and above-market earnings on deferred compensation; the second column

was “all other compensation,” which comprised mainly pension contributions and life insurance

premiums. However, if the aggregate value of perks did not exceed $50,000, firms did not need to

disclose perks at all. In addition, firms under the old rule were required to itemize the cost of in-

dividual perks, such as personal aircraft use, if they exceeded 25% of the overall perk total, as-

suming that the total exceeds the $50,000 threshold.

Evidently, firms had different ways to obfuscate the disclosure of perks under the old rule. For

example, Yermack (2006a) points that, even when the aggregate cost of perks exceeded $50,000,

the total cost of perks may not have been observed directly, because some companies disclosed

the total cost of perks only after aggregating it with other data items reportable in the same col-

3 Executive compensation and related party disclosure, SEC Release No. 33-8655. Other disclosure require-ments in the rule involve director compensation, related party transactions, director independence, and bene-ficial ownership.

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umn of the table, such as above-market interest on deferred compensation and income tax reim-

bursements.

Yermack (2006a) also reports that some firms avoided disclosing individual perks by aggres-

sively classifying certain types of income such as retirement contributions and split-dollar life

insurance policy payments as ‘‘perquisites’’ and counting them toward the overall threshold,

thereby allowing it to itemize only those categories and in turn obscuring the consumption of

other perks. In addition, under the old rules, there were several violations of perk disclosure, ag-

gressive treatment of perks as business expenses, categorization of perks as bonus instead of

“other compensation,”, use of opaque language to obfuscate the true nature of the perquisites, or

failure to identify and quantify significant individual perks.4 In light of growing concern about

these matters, the SEC indicated rather vigorously that it was concentrating on the issue of execu-

tive perquisite disclosure and that it would not take kindly to these schemes.5 6

Under the new rules, several steps were taken to ensure disclosure of perks. First, to ensure

that firms cannot hide perks, each and every perk should be disclosed, as well as the aggregate

value of these perks. Further, any individual perquisite item valued at the greater of $25,000 or

ten percent of total perquisites must also be quantified separately. Disclosure is not required if the

aggregate value of the perquisites is less than $10,000.

In addition, the new disclosure rules explicitly recognize that the distinction between “other

annual compensation” and “all other compensation” caused confusion and the two columns are

now merged into one, called “all other compensation.” The new amendments emphasize that any

item of compensation not reported in the other columns must be included in this new column,

consistent with the view that all compensation must now be disclosed, with the exception of per-

4 For example, in September 2004, the SEC determined that the General Electric Co. had failed to fully and accurately disclose the various benefits provided to its CEO (In the Matter of General Electric Company, SEC Release No. 34-50426, September 23, 2004). In April 2005, the SEC settled an action it had brought against Tyson Foods, Inc, and its former chairman and CEO for misleading disclosures of perquisites (In the Matter of Tyson Tyson Foods, Inc. and Donald Tyson, SEC Release No. 34-51625, April 28, 2005). The firm settled by paying a penalty of $1.5 million and Donald Tyson an additional $700,000. There have also been several high profile cases of abuse and misappropriation. In one of the most egregious of these cases (one that still makes headlines in the popular press, e.g., Bruno, 2008), Dennis Kozlowski, the ex-CEO of Tyco International, Ltd., allegedly had his employer pay half the $2 mil-lion dollar bill for his wife’s 40th birthday party, while living in a $30 million apartment provided by the firm, which allegedly in-cluded the well publicized $6,000 shower curtain. 5 See the speech by Alan L. Beller, “Remarks Before Conference of the NASPP, the Corporate Counsel and the Corporate Executive,” available at http://www.sec.gov/news/speech/spch102004alb.htm. 6 In response to these events, few corporations abandoned executive perks altogether, often increasing the monetary compensation of the executives to “make up for the difference in value” (Dalton and Dalton, 2008), while other enhanced the transparency of their proxy statements, even voluntarily disclosing perquisites above and beyond the legal requirement. For example, Partigan (2005) re-ports that over forty percent of the 100 firms he surveyed had made such voluntary disclosures of perquisites in their 2005 proxy state-ments.

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quisites with an aggregate value lower than $10,000. The new disclosure regulation draws a dis-

tinction between (i) “perquisites and other personal benefits” and (ii) “additional all other com-

pensation column items.”7 To ensure that items are not aggregated, it mandates that each item of

additional compensation that exceeds $10,000 be separately identified and quantified. Compensa-

tion items valued at less than that amount must be included in the column, but need not be identi-

fied by type and amount.

Besides the enhanced disclosure of perquisites, the rule also requires changes to the way in

which other compensation items are disclosed. The major changes are as follows. (i) A new table

is added to the proxy statements with information on all option grants, including the timing, strike

price, and terms of the awards. Under the old rules, this detailed information was provided in the

individual filings of changes in option ownership (file 4). (ii) Options are now valued based on

FAS 123R in the compensation table. (iii) A detailed description of changes in the value of ex-

ecutive pensions must be included, with a new format for pension contributions. (iv) The criteria

used to compensate the manager, especially with respect to options, must be described.

2.2 Theory and hypotheses

Economic theory offers two competing perspectives on managerial perquisites. The standard

optimal contracting view suggests that perks arise as the equilibrium outcome of an arm’s length

bargaining between managers and shareholders: in a corporation with diffuse ownership, the

board of directors, acting on behalf of the shareholders, chooses the managerial compensation

contract that maximizes the value of the firm by providing the manager with incentives that in-

duce behavior that is in the best interests of the firm. As Fama (1980) points out, such contracts

may well optimally include perks. For example, a firm may benefit by providing its CEO with a

chauffeured limousine to spare him the stresses of the morning commute but the CEO would not

be willing to pay for this out of pocket because the cost of this arrangement exceeds its private

value to the CEO.8

Alternatively, perks can be viewed as means through which managers divert some of the sur-

7 The SEC does not define what constitutes a perk, arguing that “it is not appropriate ... to define perquisites or personal benefits, given that different forms of these items continue to develop, and thus a definition would become outdated.” The general guidance states that an item is a perquisite or personal benefit “if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company.” 8 Marino and Zabojnik (2008), present a formal model that shows the tradeoffs between benefits and costs of perks.

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plus that the firm generates. This perspective of perks as a form of managerial excess is well es-

tablished in the corporate finance literature on agency theory. For example, Grossman and Hart

(1980), Jensen (1986), and Jensen and Meckling (1976), among others, all point to perks as the

driver of conflicts of interest between managers and investors. Hart (2001) refers to perks as ben-

efits that “are attractive to management but are of no interest to shareholders – in fact they reduce

firm value.” According to this view, perquisites constitute an especially effective misappropria-

tion vehicle because, until recently, they were often unreported, or at least significantly obfus-

cated, thus constituting a form of hidden compensation, along with generous pension plans (Beb-

chuk and Fried, 2004; Bebchuk and Jackson, 2005), lavish severance agreements (Yermack,

2006b), and practices such as backdating (Heron and Lie, 2007; Lie, 2005; Yermack, 1997). Such

hidden compensation plays a central role in Bebchuk and Fried’s (2004) “managerial power” per-

spective of executive compensation according to which pay arrangements are influenced by the

power that certain executives exert, rather than being negotiated on an arm’s length basis.9 Boards

of directors then attempt to shield pay arrangements from shareholder scrutiny by obscuring the

amounts of compensation because the obfuscation relieves pressure on them to reduce pay levels.

Existing empirical research on perquisites finds mixed evidence on their role (Yermack,

2006a; Rajan and Wulf, 2006), but this may well be due to the fact that a substantial amount of

perquisites was not accurately disclosed until the new SEC regulations went into effect.

2.3 Development of hypotheses and empirical predictions

This section presents the main hypotheses of the paper. The first hypothesis concerns the im-

pact of the SEC regulation on perks disclosure. The SEC rules provide an interesting laboratory to

examine the relation between perks and agency conflicts. We wish to explore this relation

through three tests. First, we want to establish that the rules had indeed a bite, and that they af-

fected the disclosed level of perks. It is not immediately clear that the new disclosure rules had

any effect on the level of disclosure. First, some firms may have severely curtailed perquisite

awards, as a response to the new rules and the accompanying heightened public awareness.10

Second, some firms may have increased their disclosure of perks beyond the prior legal require-

ment, in anticipation of the new rules. This leads to the first hypothesis (stated in alternative

9 See Kuhnen and Zwiebel (2007) for an equilibrium model of hidden compensation in the “managerial power” framework. 10 Speaking on the effect of the new compensation disclosure rules, a representative of Institutional Shareholder Services was quoted as saying that “we’ll never know how bad it really was with respect to perks ... They’ll be gone before they’re ever reported” (Durfee, 2006).

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form):

Hypothesis 1: The new disclosure rules significantly increase the level of perquisites disclosed

relative to previous years, with no significant changes in the other components of compensation.

If H1 holds and the new executive perquisite disclosure rules have a considerable impact, then

we can further explore the relation between the enhanced disclosure of perks under the new rule

and agency conflicts. Rajan and Wulf (2006) and Yermack (2006a) follow Jensen (1986) in test-

ing the relation between perks and agency conflicts. According to Jensen (1986), firms that have

fewer growth opportunities and higher free cash flows are more prone to agency conflicts and

their executives divert more of their surplus by consuming more perks. In contrast, the optimal

contracting view of perquisites suggests that these variables do not matter: perks, like other com-

ponents of the optimal compensation contract, are determined by their relative productivity in

inducing CEO performance and in reducing compensation costs, and not by the level of free cash

flow and lack of growth opportunities. This forms our second hypothesis:

Hypothesis 2: Consistent with an optimal contracting framework, there is no relation between the

level of perquisite consumption and a lack of growth opportunities or high levels of free cash

flows in the cross-section of firms.

Finally, H3 examines the market pricing of the newly disclosed perks. We follow the method-

ology of Yermack (2006a) in that we check the stock price reaction around the disclosure of ex-

ecutive perks in 2007, after the rule took effect. If perks are indeed a sign of excess then we

should observe a negative relation between the increase in perk disclosure and the abnormal re-

turn of the stock.

Off course, the market would react negatively to the disclosure of perks only to the extent that

the market did not anticipate them. We argue that the market would react more negatively to perk

disclosure in firms which did not disclose any perk in previous years and started disclosing these

perks after the rules than the disclosure in firms that did disclose perks in previous years. Yer-

mack (2006a) has also focused on the market reaction of first-time disclosing firms to capture the

surprise effect. Our study differs from that of Yermack in that the decision to disclose in our sam-

ple can be attributed to the rule, and therefore is not related to the decision to give the perk in the

first place.

We further hypothesize that, to the extent that perks are a sign of agency conflicts, the market

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reaction to first-time disclosing firms which disclosed larger amounts of perks should be more

negative than first-time disclosing firms which disclosed smaller amounts of perks. We summa-

rize our prediction in the following hypothesis:

Hypothesis 3 Firms that disclose perks for the first time after the new regulations go into effect

exhibit significant negative abnormal returns. Moreover, the abnormal return is monotonically

related to the magnitude of the newly disclosed perks.

3 Data description

This section describes our data on executive perquisites and discusses how we follow compensa-

tion items over time across the two SEC formatting standards.

3.1 Data sources

The sample includes 361 firms that were randomly sampled from the S&P 1500 index and that

filed their proxy statements with the SEC between January1, 2007 and August 31, 2007. The S&P

1500 index is composed of firms that belong to the S&P 500 index, the S&P mid cap 400 index,

and the S&P small cap 600 index. We sample each index separately to ensure that we obtain suf-

ficiently many observations from each group, which in turn should provide a more complete view

of perks across both small and large corporations, as little is known from existing studies about

perks in small firms. Our sample has 130 large firms, 131 medium-sized firms, and 100 small

firms. We require that firms file their proxy statement with the SEC between January 1, 2007 and

August 31, 2007, to ensure that the disclosure in these proxy follows the new rule requirements,

as firms were first required to disclose compensation in the new format beginning in mid-

December 2006.

We hand-collect information on compensation and perquisites for CEOs and the top five ex-

ecutive officers from proxy statements available through the SEC Edgar database. Data on “all

other compensation” are collected from the summary compensation table, and data on perquisites,

pensions and insurance are collected from the footnotes to the table. Since the information dis-

closed in proxy statements in any given year pertains to compensation arrangements in place dur-

ing the previous fiscal year, our compensation data from the 2007 filings are for fiscal year 2006.

To keep the costs of data collection manageable, for prior years, we retrieve compensation data

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through Standard and Poor’s ExecuComp. We merge the compensation data with financial state-

ment data from Standard and Poor’s Compustat and stock market data from the Center for Re-

search in Security Prices (CRSP).

3.2 Comparing perks across the different disclosure regimes

The newly adopted executive compensation disclosure rules modify the format under which per-

quisites are disclosed. One should thus exercise caution when comparing perquisite amounts for

2006 to those disclosed in prior years. Specifically, the new disclosure requirements merge the

prior columns “other annual compensation” and “all other compensation” into a single column,

“all other compensation.”

To allow for a reasonable comparison between perquisite amounts disclosed in 2006 and those

disclosed in prior years, we follow the following procedure. For fiscal year 2006, we have the

exact amount of perks, which we hand-collect from the footnotes to the compensation table. For

prior years, we use the value in the “other annual compensation” column as a proxy for the value

of the perks. This measure includes not only perquisites but also gains on deferred compensation;

and is thus likely to overstate the level of perks disclosed prior to 2006. Therefore, to the extent

that we find an abnormal increase in the amount of perquisites in 2006 relative to prior years, this

abnormal increase is likely to represent a lower bound on the actual increase.

Another method that we use to track the level of perks over time is by comparing the amount

under “all other compensation” in the current format to the sum of the “other annual compensa-

tion” and “all other compensation” amounts in the previous format. The advantage of this ap-

proach is that it compares the total value of “all other” items under both rules and therefore the

risk that we miss perquisites which are miscategorized under the old rule should be kept to a

minimum. The disadvantage of this method is that it compares not only changes in perks, but also

changes in other items, such as the value of pensions, insurance, and deferred compensation.

Finally, to ensure that our results are not driven by changes in other sources of compensation

besides perks, we also compare the value of pension benefits and insurance that we collect for

2006 to the value under “all other compensation” in previous years.

3.3 Descriptive statistics

Table 1 contains basic descriptive statistics on the main variables of interest for both the firms in

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the sample (Panel A) and, for comparison, all S&P 1500 firms (Panel B). The results in both pan-

els are presented by firm size because in our analysis, we pay particular attention to differences in

the effect of the disclosure requirements across firms with different market sizes.

Two important observations emerge from this analysis. First, comparing the two panels in Table 1

reveals that the firms in our sample are not systematically different from other firms in either the

S&P 500, S&P MidCap 400, or S&P SmallCap 600 groups. Thus, while our sample is small, it

appears to be representative of the firms in each of the three groups of the broad S&P 1500 Index,

consistent with the fact that the firms were sampled randomly from these groups.

Second, a comparison of the firms in our sample with those in Rajan and Wulf (2006) and

Yermack (2006a) reveals that the large firms in our analysis are quite similar to the firms in those

two papers. For example, large firms in our sample have an average size of approximately 40,000

employees and $14 billion in sales, which is quite similar to the 44,000 average number of em-

ployees in Rajan and Wulf (2006) or the $11 billion in sales in Yermack (2006a). On the other

hand, the small and medium-sized firms in our sample are not represented in these studies. The

newly enacted change in disclosure compensation regulation makes perquisites in small and me-

dium firms much more transparent than before and is therefore included in our study.

Table 2 reports descriptive information on the amount of perks disclosed in 2006 under the

new rules, as well as the level of company contributions to defined contribution plans and the

value of life insurance premiums paid by the corporation, first for the entire sample (Panel A) and

then separately for each size group (Panel B). Nearly 80% of the CEOs in our sample disclose

perks and the average perk disclosed for these CEOs is $115,600. The fact that the median perk is

$44,000 and that the maximum perk exceeds $1.2 million suggests a skewed distribution of perks

across firms. Further, 86% of the CEOs in our sample disclose pension contributions (the average

amount disclosed among the firms that make these contributions is $69,500) and 58% disclose

life insurance premiums (valued at $23,600 on average). The average value of perks to the top

five executives is about $150,000 in the 87% of firms that make such disclosures. Untabulated

results further reveal that average disclosed CEO perks total $92,000 across all firms (including

firms not disclosing anything) and $241,000 for the top five named executives, indicating that

executives other than the CEO also receive substantial perks. The maximum perk to the top five

executives is $4.82 million and in 87% of the firms in our sample, at least one executive receives

perks in 2006.

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We also provide in Panel A detailed information on the types of perks disclosed.11 Panel A in-

dicates that the most frequent types of CEO perquisites in our sample are: automobile allowance

(35%), tax reimbursements or “gross-ups” (29%), aircraft usage (24%), tax preparation and fi-

nancial planning (20%), and country club dues (17%). Other items are much less frequent but can

nonetheless be quite costly, e.g., only 4% of firms disclose that they cover security expenses for

their CEOs, but in one instance this perk alone is valued at $1.2 million. The Appendix provides

the full list of all the various items that were disclosed in the proxy statements, beyond those that

we show in Table 2. Altogether, there are more than thirty itemized variables, suggesting that ex-

ecutives receive many different types of perks beyond the large perks reported in Table 2.

Panel B in the table describes the disclosed perquisites separately for large, medium and small

firms. Both the frequency with which perquisites are awarded, and their values when awarded,

tend to be smaller in small firms. However, there is much variation in disclosed perks within the

size groups and in some cases the largest disclosure among small firms exceeds the maximum

among the large firms. For example, the largest tax reimbursement is $199,100 in small firms

compared to $197,300 in large ones. Also, while the CEOs of large firms are awarded the aircraft

perk much more often than those of small firms, the average amounts, conditional on the award,

are almost identical at about $150,000.

It is informative to compare the frequencies and dollar values for perquisites that we report for

large firms to Yermack’s (2006a) data on 237 Fortune 500 firms between 1993 and 2002. Yer-

mack (2006a) reports a disclosure frequency of 16% for aircraft usage, with a mean amount of

$65,200, both of which are substantially lower than our estimates of 40% and $151,800. While

the higher frequency of aircraft perk disclosure in our sample may be due to the new perquisite

disclosure requirements, it is also consistent with the increase over time in the incidence of this

perk identified by Yermack (2006a).12 In the next section we formally test whether the enhanced

disclosure was due to the new disclosure requirements. For perquisites other than aircraft, the dis-

closure frequencies in our sample are much higher than Yermack’s (2006a) but the amounts dis-

closed tend to be somewhat smaller, consistent with the view that the differences are driven by

the new addition of perks that were previously undisclosed. For example, Yermack (2006a) re-

ports a frequency of 9.2% of company provided financial counseling with a mean value of

11 These data are somewhat subject to censoring, as individual perquisites need not be quantified unless their value exceeds $25,000 or 10% of the aggregate value of all perks. 12 Yermack (2006a) reports that the frequency of disclosed personal aircraft use by CEOs increases to over 35% in 2003, the last year of his sample.

- 14 -

$38,300, in our sample the frequency is 28% with a mean value of $20,000.

In Table 3 we show the distribution of perquisites by industry to examine whether the inci-

dence of perquisites varies across industries. The analysis only includes industries in which we

have at least five sample firms. Firms operating in the financial institutions (SIC 61), transporta-

tion (SIC37) and retail (SIC 59) industries offer the most CEO perks. There is a great deal of

variation in the propensity to award perks across industries.

4. Impact of the new disclosure rules

This section tests our first hypothesis: it examines whether the newly adopted executive com-

pensation disclosure rules had a significant impact on the disclosure of perquisites.

In order to analyze the effect of the new SEC regulation on disclosure practices, we investi-

gate whether perk disclosure after the rules is abnormally higher than the amounts of perquisites

disclosed in prior years, controlling for economic variables that affect the level of perks.

The economic control variables include CEO fixed effects to control for any firm-specific and

CEO specific attributes that determine the level of perks in firms, and the size of the firm, as lar-

ger firms provide larger compensation to their CEOs, and potentially larger perks.

Our first specification is therefore a panel regression of the log CEO perquisites on year

dummy variables, log sales, and CEO fixed effects, over the period 2003-2006:

ln(1+perksit) = β1 YR2004 + β2 YR2005 + β3 YR2006 + β4 Sizeit + αi + εit , (1)

where YRt is a dummy variable that equals one in year t and size is the natural logarithm of total

sales. We choose not to include earlier years in the panel because previous research suggests that

there was a structural break in compensation practices after the corporate scandals of 2002 (e.g.,

Cohen, Dey, and Lys, 2007 and Chhaochharia and Grinstein, 2008).

If the new executive compensation disclosure rules had a significant impact on the amount of

disclosed perquisites, then the coefficient β3 should be significantly larger than the coefficient β2.

Moreover, since the dependent variable is in logs, the coefficient itself represents the (log) gross

percentage increase in disclosed perks in 2006 compared to the benchmark year (2003). In our

analysis we also include two variants of regression (1). The first has only one year dummy, for

- 15 -

the year 2006. The second interacts the year dummies with the size group which the firm belongs

to, so as to examine whether the new compensation disclosure rules had a larger impact on

smaller firms. As discussed in Section 3, 2006 perquisites are based on the amounts we hand-

collect from the proxy statements; for prior years we use the amounts reported under “other an-

nual compensation,” which we retrieve from ExecuComp.

Table 4 contains the results: Panel A reports the regressions and Panel B presents hypotheses

tests on the year to year changes. The reported t-statistics employ a robust cluster variance esti-

mator (Andrews, 1991; Petersen, 2007; and Rogers, 1993). The first row in Panel A shows a coef-

ficient of 0.14 for the 2004 year dummy (t-statistic 1.27), a coefficient of 0.19 for the 2005 year

dummy (t-statistic 1.55), and a coefficient of 1.14 for 2006 (t-statistic 8.17). The coefficient of

each year dummy represents an increase of exp(coefficient) in perquisites relative to 2003. Thus,

the coefficient of 0.14 suggests that the amount of disclosed perquisites is about 15% larger in

2004 than in 2003. The coefficient of 0.19 suggests that perks in 2005 are about 21% larger than

2003, and the coefficient of 1.14 suggests that perks are about 213% larger in 2006 than in 2003,

or about a three-fold increase. The increase in 2006 is highly significant statistically, while the

prior increases are not.

The difference in the above year by year coefficients represents the increase during that year.

For example, the difference between 1.14 and 0.19 represents a 159% increase in perks disclosure

in 2006, compared to the difference between 0.19 and 0.14 – a 5% increase in 2005. Panel D

shows that a test of the null hypothesis that the increase between 2004 and 2005 equals the in-

crease between 2005 and 2006 is rejected at the 1% level.

The regression in the second row in Table 4 Panel A includes only the 2006 year dummy, and

therefore the interpretation is that the coefficient captures the increase in perquisites relative to

the average amount disclosed over the years. Consistent with the results in the first regression, the

coefficient of 0.98 suggests a very substantial increase: 166% with a t-statistic of 10.25.

The third regression in Table 4 interacts the year dummies with dummies for whether the firm

belongs to the S&P 500 (CAPL = 1), the MidCap 400 (CAPM = 1) or the SmallCap 600 indices

(CAPS = 1). This analysis reveals that, within each size group, the increase in disclosed perqui-

sites in 2006 is unusual relative to prior years. Perhaps not surprisingly, the largest increase is in

small firms, where it reaches 335% (t-statistic 6.21). However, large and medium sized firms also

experience very substantial increases: 203% and 261% respectively (with t-statistics of 5.81 and

- 16 -

4.76).

A potential drawback of the above specification is that the proxy for perks in previous years

could be biased downward because firms might choose not to disclose the perks under the “other

annual” column (as required), but rather under the “other total” column. To address this possibil-

ity we present an alternative test, where we compare the amount under “all other compensation”

in 2006 to the sum of “other annual compensation” and “all other compensation” in prior years.

The advantage of this approach is that it compares the total value of “all other” items under both

rules and therefore the risk that items are miscategorized should be kept to a minimum. The dis-

advantage however is that it compares not only changes in perks, but also changes in other items,

such as the value of pensions, insurance, and deferred compensation. We therefore also investi-

gate whether there was a change in the disclosure of pension and insurance amounts, by compar-

ing the 2006 pension and insurance amounts to the amounts previously disclosed under the head-

ing “all other compensation.”

The results in Panel B of Table 4 show that our conclusions regarding the increased disclosure

in 2006 are robust to using a broader measure that includes both perks and pension and insurance

contributions. However, the increase in 2006 appears less dramatic (though still quite large). For

example, we find that “all other compensation” is 93% higher in 2006 relative to 2003. A test of

the hypothesis of equal differences between 2004 and 2005, and 2005 and 2006, is strongly re-

jected (see Panel D).

Finally, Panel C shows that, in contrast to the increase in perquisites, there is no evidence of a

significant increase in the disclosure of insurance and pension payments over the years. The sec-

ond regression in Panel B shows evidence of a decline in these contributions in 2006 relative to

prior years, but the third specification (and the hypotheses tests in Panel C) suggest that the effect

is weak: it is limited to large firms, and none of the tests reject equality at conventional statistical

significance levels.

The results in Table 4 suggest that the firms in our sample experience a statistically signifi-

cant, and economically large, increase in the level of disclosed perks in 2006. However, while

perquisites in 2006 are substantially larger than in prior years, it is possible that the increase is not

the result of the new disclosure requirements for perks, but rather a mere upward trend in total

compensation in 2006. We investigate this possibility by examining the time series behavior of

“monetary compensation,” which we define as the sum of salary, bonus and long-term incentive

- 17 -

plan payments.13

Table 5 reports the results of pool-panel regressions that are similar to those in Table 4, except

that the dependent variable is now monetary compensation instead of perquisites. For CEOs, in

the first specification, the coefficients on all three year dummies are statistically significant, sug-

gesting that monetary compensation is higher in 2004, 2005 and 2006, relative to its level in

2003. However, Panel B shows that the increase between 2005 and 2006 is not statistically sig-

nificantly different from the increase between 2004 and 2005. Similarly, the coefficient on the

dummy for 2006 in the second regression implies a small and statistically insignificant increase in

2006 relative to the average over the prior years: 3% with a t-statistic of 1.08. Finally, the last

three specifications show similar results for the top five executives: they experience a small re-

duction in monetary compensation of 3% which is also insignificant. Overall, it appears that

monetary compensation is not different in 2006 compared to prior years.

To further investigate whether there is a relation between changes in perquisites and changes

in monetary compensation, we also examine the correlation between the residuals from the re-

gressions in Tables 4 and 5. The correlations are all small and statistically insignificant at conven-

tional levels. For example, for the first regression specification, the correlation is 0.001 and it is

insignificant for CEOs, for the top five executives it is 0.03 which is also insignificant. Abnormal

changes in perquisites and monetary compensation appear unrelated.

Overall, the results in this section indicate a large and statistically significant increase in the

level of disclosed perks in 2006, and this increase appears to be driven by the regulation rather

than changes in monetary compensation over the years.

5 Economic determinants of perquisites

This section tests our second and third hypotheses: it investigates whether observed levels of per-

quisites are consistent with optimal contracting, or alternatively, unresolved agency conflicts.

5.1 The cross-section of perquisite consumption

To test H2 - whether perks arise as part of an optimal compensation contract, or as a result of

agency conflicts, we consider the determinants of perks in the cross-section of firms.

13 We omit options and stock grants from this analysis, as the new disclosure rules require reporting these based on 123R. We were therefore unable to obtain comparable figures.

- 18 -

If perquisites are indeed the equilibrium outcome of an optimal compensation contract, then

there should be no cross-sectional association between perks and variables that measure the scope

of such conflicts, after controlling for the factors that might determine the equilibrium levels of

perquisites. Since perks are a form of compensation, we include as economic control variables the

standard economic determinants of the level of CEO compensation: proxies for the firm’s de-

mand for a high quality CEO and contemporaneous firm performance. Consistent with prior work

(e.g., Core et. al, 1999; Rosen, 1982; and Smith and Watts, 1992), we expect larger firms, firms

with more complex operations, and firms with more investment opportunities to demand higher

quality CEOs who command higher wages. Our proxy for the size and complexity of the firm is

its market capitalization.14 Our proxy for the firm’s investment opportunity set is its book-to-

market ratio. Of course, the results of optimal compensation models also suggest that the level of

compensation is positively related to the performance of the firm. We measure performance as

the annual stock return.

Table 6 presents the results of the basic regression of the log of perquisites in fiscal 2006 on

the economic control variables. We consider perks to both the CEO and the top five executives.

The coefficients on performance and investment opportunities are not statistically significantly

different from zero, suggesting that perks are not awarded for performance. These standard eco-

nomic determinants of compensation do not appear to exhibit a robust association with perqui-

sites, even though they are known to be significantly related to other components of compensa-

tion in the cross-section of firms (Core, Holthausen and Larcker, 1999). The coefficient on size is

large and statistically significant, consistent with the result in Table 2 that larger firms tend to

award perquisites more frequently and in greater amounts. Together, the optimal compensation

variables explain 9% of the cross-sectional variation in perquisites in 2006 in our sample.

The next regression adds to these economic variables proxies for the potential for agency con-

flicts. Jensen (1986) argues that firms with high cash flows but low growth opportunities are more

prone to agency conflicts, since managers have free cash in their hand and no good investment

opportunities. The free cash provides opportunities to these managers to consume large perks at

the expense of the shareholders. We therefore add to the basic regression in Table 6 two more

variables. The first is Free Cash Flow, which is defined as the decile ranking of the firms’ free

14 We use the decile ranking of firm size within the sample to reduce the effect of outliers on our results.

- 19 -

cash flow in our sample.15 The firms’ free cash flow is defined as the operating income before

depreciation minus the sum of interest, taxes paid, and capital expenditures. “Growth” is sales

growth from the previous year. Consistent with the view that perks are a sign of excess, we find

that the coefficient on free cash flow is positive and significant and that the coefficient on growth

is negative and significant. These variables are also economically significant. An increase in free

cash flows from one decile to the next is associated with about 16% increase in the amount of

perks. Similarly, a one standard deviation increase in firms’ growth opportunities (17.4%) is as-

sociated with about 24% decrease in perks (-1.39*17.4%). Rajan and Wulf (2006) and Yermack

(2006a) both follow Jensen (1986) in testing the relation between perks and agency conflicts,

however neither paper finds evidence consistent with the hypothesis that perks are higher in firms

with low growth and high cash flows. We interpret the fact that we do as further evidence that the

new executive compensation disclosure rules had a very significant impact on the way in which

perquisites are reported to the public. The increased transparency increases the power of our tests.

It is also possible that by including both large and small firms in the sample we allow for more

variation in these variables and increased statistical power.

The third regression in Table 6 adds as another agency variable a proxy for the relative power

or contribution of the CEO, namely the CEO’s relative pay, or “CEO centrality.” A more central

CEO, in terms of ability or power, is expected to have both considerable influence over the set-

ting of their own pay, and greater control over the pay of other executives. Chatterjee and Ham-

brick (2007) show that CEO centrality is significantly positively correlated with indicators of

CEO narcissistic tendencies, such as the prominence of the CEO in annual reports and press re-

leases. Bebchuk, Cremers and Peyer (2008) find that CEO centrality is associated with lower firm

value, lower stock returns accompanying the announcement of acquisitions, and higher odds of

the CEO receiving “lucky” option grants, a form of hidden compensation (Bebchuk, Ginstein and

Peyer, 2008).

Our proxy for CEO centrality is the fraction of the top five total compensation (less perks)

captured by the CEO. The results in the third row of Table 6 reveal that greater CEO centrality is

positively associated with the level of perquisites. The coefficient on CEO centrality is highly

significant statistically, with a t-statistic of 2.44, but has a somewhat more modest effect on the

15 We use rankings rather than actual free cash flow to reduce the effect of outliers on our results. Of course, larger firms are more likely to have larger cash flows than smaller firms, and we therefore control in the regression also for the size ranking of the firms.

- 20 -

level of perquisites: A 10% increase in CEO centrality is associated with about 1.3% increase in

the level of perks (10%*0.13).

The fourth row in Table 6 includes only the three agency variables, free cash flow, growth,

and CEO centrality. Without any economic controls, these variables alone explain 13% of the

variation in the level of disclosed perquisite consumption across firms. Finally, Panels B through

D in Table 6 examine whether our results are robust to (i) using travel perks alone, as opposed to

total perks, and (ii) measuring perks to the top five executives rather than only CEO perks. We

find that our results are indeed robust to these alternative specifications and definitions. The coef-

ficient of CEO centrality is negative in regressions that involve perquisites to the top five, as we

would expect if this variable indeed captures CEO power relative to the other executives.

Overall, the results in Table 6 show that the variation in perquisites is explained by agency

conflict variables in the cross-section of firms. While this relation is indicative of the existence of

unresolved agency problems that drive the level of perks in the cross-section, it is also potentially

consistent with evidence that we failed to adequately specify a model for the equilibrium com-

pensation of executives in the form of perquisites. In the next section, we conduct a second series

of tests in order to distinguish between these alternative interpretations of our results.

5.2 Market reaction to the increased disclosure of perks

The previous section identifies a strong relation between the level of perquisite disclosure and

variables associated with the potential for agency conflicts: the Jensen (1986) free cash flow

problem and the relative power of the CEO. To the extent that higher perquisite consumption is

indeed associated with agency conflicts within the firm, we should observe a negative stock mar-

ket reaction when the perks are disclosed for the first time, especially among firms that announce

large perquisites.

We conduct an event study to test this hypothesis, focusing on the cumulative abnormal re-

turns in the eleven days surrounding the firm’s filing of its proxy statement in 2007.16 Panel A in

Table 7 contains the evidence: it reports the means and t-statistics of the cumulative abnormal

returns (market adjusted) for three different windows surrounding the day on which the firms file 16 Yermack (2006a) points to the possibility that some firms begin printing and mailing hard copies of their proxies within the week prior to the document’s posting at the SEC, and that others might post the docu-ments after the market closes. We therefore allow a large-enough window around the announcement date to account for these possibilities. As robustness checks, we also test abnormal returns within narrower win-dows.

- 21 -

their proxy statements.17 The table shows an overall negative market reaction to the disclosure of

executive compensation arrangements in proxy statements filed in 2007: in the eleven-day event

window surrounding the filing date (-5,+5), firms on average experience a negative cumulative

abnormal return of -0.59% (t-statistic -2.10).

To gain further insights into what might be driving these large negative abnormal returns

around proxy statement filing dates, we partition the firms in our sample into two groups: the

group for which the firm did not disclose any amounts in its “other annual” column in previous

years. We call this group ”first time disclosure”, and call the complementary group “non first-

time disclosure”. In the former group, the abnormal return in the eleven-day window surrounding

the proxy statement filing date is -1.77% with a t-statistic of -2.80. In the latter group, the cumu-

lative abnormal return is -0.14%, and is not statistically significantly different from zero at con-

ventional levels of significance, (t-statistic of -0.46). The average abnormal returns in the two

groups are shown in Figure 2.

Thus, the negative overall abnormal return around proxy statement filing dates in 2007 is

driven by those firms that disclose perquisite awards to their CEOs for the first time, consistent

with the view that prior perquisite disclosure is suggestive of a higher likelihood of continued

future perquisite awards.

To further explore the effect of first-time disclosure and abnormal return, we examine the rela-

tion between the amounts of first-time disclosed perks and the abnormal return. To the extent that

the disclosed perks are “bad news” and to the extent that they are a manifestation of an agency

conflict, we should observe a monotonic relation between the level of perks and the abnormal

return. We explore this relation in Panel B of Table 7. We sort all firms that disclose perquisites

for the first time into four groups, based upon the magnitude of the disclosed perquisite consump-

tion relative to the size of the firm, using the ratio of perks to market capitalization. We then cal-

culate the abnormal return for each of the firms, within the eleven-day window surrounding the

filing of the proxy statements. Panel B shows that firms that disclose perks in the lowest quartile

of perks to market capitalization experience a small and statistically insignificant abnormal return

17 Firms often file so-called preliminary proxy statements (SEC form PRE 14A) ahead of the final proxy statements (SEC form 14A). These preliminary proxy statements sometimes contain the requisite executive compensation disclosures, but this not true in general. Given the paramount importance of using accurate event dates in event studies (Brown and Warner, 1985), we manually check each form 14A to determine whether it discloses executive compensation data. Thus our dates are the dates on which the executive com-pensation arrangements were first disclosed in official SEC filings.

- 22 -

of -0.67% (t-statistic -0.86). In contrast, firms that for the first time disclose substantial CEO per-

quisite consumption suffer a statistically significant reductions in market value: the average ab-

normal return among firms that announce perks in the largest quartile of perks is -4.79% with a t-

statistic of -2.10. Further, there is a monotonic relation between the amount of perks newly dis-

closed and the magnitude of the stock-market reaction. The cumulative abnormal returns are de-

picted graphically in Figure 3.

Our results are largely consistent with those of Yermack, who documents negative abnormal

return of -1.13% to firms that disclose personal use of aircrafts for the first time. However, the

magnitude of returns in our sample to firms that disclose perks for the first time (-1.77%) is larger

than documented in Yermack. We also document that for particularly large perks, disclosed for

the first time, the abnormal negative return becomes significantly higher (-4.79%).

Rajan and Wulf (2006) interpreted Yermack’s results as anecdotic since he studied the most

egregious cases of perk abuse. Our findings suggest that the negative market reaction to the dis-

closure of perks is more than anecdotic. In our random sample of 361 firms, about 33% disclosed

perks for the first time, and experienced an abnormal negative return on average upon disclosure.

Out of the 33%, the top half (about 16%) had a particularly large and statistically significant ab-

normal return. .

6. Conclusion

In December 2006, the new Securities and Exchange Commission rule requiring enhanced

disclosure of perquisites to managers in public U.S. firms went into effect. This paper uses this

event to shed light on the role of perquisites in executive compensation.

We find that firms responded to the rule by disclosing substantially larger amounts of perks. In

contrast to previous results, we find that, once firms adhere to the new rule, there is a positive

association between the level of perks and the firms’ free cash flows and a negative association

between the level of perks and the firms’ growth opportunities. We further find that perks are

higher when the CEO is more powerful relative to the other member of the top executive team.

We also find that firms that had not disclosed perks before the rules went into effect and that

disclose perks for the first time in response to the new disclosure regulations experience a n eco-

nomically and statistically significant negative abnormal return. Moreover, we find a monotonic

relation between the level of abnormal return and the amount of newly disclosed perks.

- 23 -

While our research focuses on the disclosure of executive perquisites, the new SEC rules also

require clearer disclosure of other items. Whether these enhanced disclosure requirements have

any effect on shareholders’ interpretation of the level and structure of CEO compensation is an

interesting topic for future research.

- 24 -

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TABLE 1 Firm-Level Summary Statistics by Size

The sample comprises 361 firms that were randomly sampled from S&P 1500 and filed their proxy statement with the SEC between January 2007 and August 2007. Large firms are sampled from the S&P 500, medium firms are sampled from the S&P MidCap 400 Index and small firms are sampled from the S&P SmallCap 600 Index. “Firm size” is the number of employees in fiscal year 2006. “Return on assets” is income before ex-traordinary items divided by total assets at the beginning of the year (all for 2006). “Free Cash Flow” is operating income before depreciation mi-nus the sum of interest, taxes paid, and capital expenditures (in 2006). “Sales growth” is the percentage change in sales between fiscal years 2005 and 2006.

Large Firms (n=130) Medium Firms (n=131) Small Firms (n=100) Mean Std Min Max Mean Std Min Max Mean Std Min Max

Firm size (000’s employees) 38.3 64.0 0.4 428.0 17.1 67.5 0.0 758.8 4.8 9.3 0.1 75.0

Sales ($M) 14,741.3 23,439.7 425.0 160,854.0 2,615.7 2,278.0 184.1 13,577.1 862.4 965.9 6.6 6,850.3

Return on assets (percentage) 6.6 6.7 -13.6 30.7 6.5 8.2 -46.0 37.5 5.5 10.5 -30.1 56.0

Free Cash Flow ($M) 2,872.9 9,014.4 -619.0 85,457.0 244.9 228.3 -453.3 1,068.2 75.7 92.7 -155.5 449.4

Sales growth (percentage) 11.1 13.8 -33.0 72.8 11.8 16.4 -52.8 73.2 13.8 23.3 -87.5 87.5

Large Firms Medium Firms Small Firms Mean Std Min Max Mean Std Min Max Mean Std Min Max

Firm size (000’s employees) 48.6 108.3 0.2 1,900.0 11.9 41.1 0.0 758.8 5.2 14.0 0.0 273.0

Sales ($M) 17,711.9 33,059.0 425.0 345,977.0 2,586.9 3,157.3 184.1 31,357.5 962.2 1,144.6 6.6 10,785.1

Return on assets (percentage) 7.4 7.6 -43.6 51.7 7.0 7.4 -38.1 37.5 6.5 10.1 -51.7 82.6

Free Cash Flow ($M) 2,933.2 7,536.0 -3,795.0 85,457.0 225.3 277.0 -839.0 2,061.0 74.4 86.9 -680.8 432.3

Sales growth (percentage) 12.7 15.9 -35.2 88.3 13.1 18.0 -68.8 100.2 16.3 23.1 -87.5 226.7

- 28 -

TABLE 2 Breakdown of “All Other Compensation” for CEOs and Top Five Executives

The sample comprises 361 firms that were randomly sampled from S&P 1500 and filed their proxy statement with the SEC between January 2007 and August 2007. Large firms are sampled from the S&P 500, medium firms are sampled from the S&P MidCap 400 Index and small firms are sampled from the S&P SmallCap 600 Index. The table presents descriptive statistics for perks, pension, and insurance contributions, hand-collected from the firms’ proxy statements, for the CEO and the top five executives. For each item, the reported means and medians are the amounts, in $ thousands, for the firms that disclose the items and “Freq.” is the percentage of firms disclosing the item. (Additional items are re-ported in the Appendix.)

Panel A: Descriptive statistics for Perks, Pension and Insurance for CEOs and the Top Five Executives

CEOs only Top Five Type Mean Median Max Freq. Mean Median Max Freq. Main Categories Perks 115.6 44.1 1,228.2 79% 273.4 149.7 4,820.3 87% Pension 69.5 15.0 1,184.1 86% 192.7 62.0 3,674.0 92% Insurance 23.6 7.7 310.8 58% 54.9 17.6 876.1 62% Main Perk Items Aircraft Usage 138.0 79.6 776.7 24% 183.7 139.8 776.7 26% Tax Reimbursement ("Grossups") 40.3 13.9 544.7 29% 92.6 30.0 2,574.6 39% Relocation Allowance 143.4 105.5 639.3 5% 167.4 97.2 1,187.3 19% Automobile Allowance 19.6 12.8 228.4 35% 48.8 38.3 305.2 43% Security Expense 151.4 25.7 1,200.0 4% 154.3 39.8 1,200.0 5% Tax Preparation & Financial Planning 18.5 11.5 106.3 20% 36.8 30.7 205.4 26% Club Dues 11.3 7.6 62.2 17% 23.8 13.7 258.4 22% Vacation/Holiday/Leave Pay 34.8 14.0 98.1 3% 65.6 35.4 280.0 7% Personal Services of Employees 68.5 73.9 130.6 1% 121.5 130.6 232.9 1% Car Service (Car & Driver) 38.0 29.5 86.6 2% 110.4 89.7 418.2 3%

- 29 -

Panel B: Descriptive statistics for Perks, Pension and Insurance for CEOs by Firm Size

Large Firms (n=130) Medium Firms (n=131) Small Firms (n=100) Type Freq. Mean Median Max Freq. Mean Median Max Freq. Mean Median Max Main Categories Perks 83% 171.4 102.4 1,200.0 80% 89.8 37.2 1,228.2 71% 59.2 27.1 557.3 Pension 88% 85.2 32.2 598.1 87% 86.2 13.2 1,184.1 81% 22.1 8.3 163.3 Insurance 55% 24.7 7.3 310.8 60% 27.9 8.9 264.4 58% 16.6 7.7 145.9 Main Perk Items Aircraft Usage 40% 151.8 100.3 776.7 21% 108.1 58.9 508.4 6% 150.2 94.7 523.0 Tax Reimbursement ("Grossups") 38% 33.8 17.2 197.3 27% 58.4 12.0 544.7 21% 27.4 10.1 199.1 Relocation Allowance 7% 136.4 116.5 406.3 5% 174.0 94.0 639.3 4% 113.2 110.8 218.7 Automobile Allowance 32% 29.7 18.0 228.4 36% 14.9 10.9 70.7 36% 13.5 13.5 43.7 Security Expense 9% 181.5 35.6 1,200.0 2% 31.4 19.9 73.8 0% . . . Tax Preparation & Financial Planning 28% 20.0 14.2 106.3 21% 19.0 11.8 95.6 9% 11.0 5.2 33.4 Club Dues 14% 18.4 11.9 62.2 18% 10.0 6.9 46.2 19% 6.0 4.6 19.3 Vacation/Holiday/Leave Pay 2% 28.6 18.8 65.4 2% 47.3 47.3 47.3 7% 36.8 11.5 98.1 Personal Services of Employees 1% 1.0 1.0 1.0 1% 73.9 73.9 73.9 1% 130.6 130.6 130.6 Car Service (Car & Driver) 3% 30.2 17.7 82.1 1% 49.6 49.6 49.6 2% 47.8 47.8 86.6

- 30 -

TABLE 3 Perquisites for CEO and Top Five Executives by Industry

The sample comprises 361 firms that were randomly sampled from S&P 1500 and filed their proxy statement with the SEC between January 2007 and August 2007. Large firms are sampled from the S&P 500, medium firms are sampled from the S&P MidCap 400 Index and small firms are sampled from the S&P SmallCap 600 Index. The table presents descriptive statistics for the use of perquisites for the CEO and top five executives by industry. The means and medians are the amounts, in $ thousands, across all the firms in the industry for which we have collected compensa-tion data. “Freq.” measures the percentage of firms that disclose perks in the proxy statement.

CEOs only Top Five

SIC n Mean Median Freq. Mean Median Freq. 61 Non-depository Credit Institutions 5 332.0 232.9 100% 1,362.5 657.1 100% 37 Transportation Equipment 8 256.1 95.1 88% 560.8 427.0 88% 59 Miscellaneous Retail 7 206.1 29.8 88% 281.5 154.9 100% 20 Food And Kindred Products 6 162.6 147.0 100% 772.3 469.4 100% 48 Communications 7 149.3 29.1 71% 232.5 105.0 100% 56 Apparel And Accessory Stores 9 146.2 43.4 89% 252.3 110.4 89% 64 Insurance Agents, Brokers, And Service 5 118.3 28.3 60% 220.7 107.4 80% 35 Industrial And Commercial Machinery And Computer Equipment 13 108.8 25.0 62% 213.1 176.3 77% 63 Insurance Carriers 17 100.9 35.3 94% 247.7 198.9 100% 49 Electric, Gas, And Sanitary Services 27 100.5 36.2 81% 264.7 175.5 93% 73 Business Services 29 88.6 32.9 69% 239.8 89.3 83% 42 Motor Freight Transportation And Warehousing 5 88.0 63.2 100% 162.4 114.5 100% 57 Home Furniture, Furnishings, And Equipment Stores 6 83.8 46.6 100% 270.8 288.9 100% 38 Measuring, Analyzing, And Controlling Instruments; Photographic, Medical And Optical Goods; Watches And Clocks 29 80.0 14.6 66% 175.2 105.4 79% 27 Printing, Publishing, And Allied Industries 8 76.8 34.2 88% 142.3 151.4 100% 60 Depository Institutions 29 71.5 24.5 83% 164.6 104.3 83% 50 Wholesale Trade-durable Goods 6 54.1 31.3 100% 184.2 107.7 100%

- 31 -

CEOs only Top Five

SIC n Mean Median Freq. Mean Median Freq. 28 Chemicals And Allied Products 30 49.3 35.4 84% 190.4 125.3 87% 87 Engineering, Accounting, Research, Management, And Related Services 5 49.3 36.8 100% 168.4 131.2 100% 36 Electronic And Other Electrical Equipment And Components, Except Computer Equip-ment 26 41.8 14.3 73% 121.7 60.1 77% 13 Oil And Gas Extraction 8 41.0 4.0 63% 129.3 28.8 63% 26 Paper And Allied Products 5 37.2 15.0 80% 147.8 193.2 100% 67 Holding And Other Investment Offices 8 25.3 14.7 63% 103.5 90.1 63%

- 32 -

TABLE 4 Perquisites Disclosure over Time

The table presents results of fixed effects balanced panel regressions of perquisite and other compensation disclosure between fiscal years 2003 and 2006. The dependent variable is the natural logarithm of one plus the measure of perk or other compensation. The sample includes 361 S&P 1500 firms that filed their proxy statement with the SEC between January 2007 and August 2007. YR2004, YR2005 and YR2006 are year dummies. CAPL is an indictor variable equal to one if the firm is in the S&P 500. CAPM is an indicator variable equal to one if the firm is in the S&P MidCap 400. CAPS is an indicator variable equal to one if the firm is in the S&P SmallCap 600. “Sales” is the natural logarithm of total sales. In panel A, the dependent variable is disclosed perquisite amounts from the firms’ proxy statements (in fiscal year 2006) and “other annual compensation” variable from ExecuComp (for prior years). In panel B, the dependent variable in 2006 is the total amount reported in the summary compensation table under the “other compensation” column; in prior years it is the sum of “other annual compensation” and “all other compensation” columns from Execucomp. In panel C, the dependent variable is pension and insurance contributions, hand-collect from the firms’ proxy statements (in 2006); in prior years it is the amount disclosed as “all other compensation”. Errors are clustered at the firm level. t-statistics appear in parentheses below the estimates.

Panel A: Dependent variable: Perquisites

Fixed Effects YR2004 YR2005 YR2006

YR2004 × CAPL

YR2005 × CAPL

YR2006 × CAPL

YR2004 × CAPM

YR2005 × CAPM

YR2006 × CAPM

YR2004 × CAPS

YR2005 × CAPS

YR2006 × CAPS

Size

R2

CEO CEO 0.14 0.19 1.14 0.64 0.81 Fixed (1.27) (1.55) (8.17) (2.64) Effect 0.98 0.84 0.81 (10.25) (4.02) 0.21 0.39 1.11 0.00 -0.03 0.96 0.19 0.18 1.47 0.64 0.81 (1.32) (2.21) (5.81) (0.02) (-0.18) (4.76) (0.91) (0.82) (6.21) (2.62)

TFIVE CEO 0.13 0.17 1.48 0.89 0.78 Fixed (0.96) (1.10) (8.45) (2.92) Effect 1.33 1.06 0.78 (11.15) (4.07) 0.25 0.36 1.37 -0.03 -0.15 1.38 0.13 0.29 1.81 0.89 0.78 (1.24) (1.62) (5.73) (-0.12) (-0.63) (5.44) (0.51) (1.07) (6.10) (2.92)

- 33 -

Panel B: Dependent variable: All Other Compensation

Fixed Effects YR2004 YR2005 YR2006

YR2004 × CAPL

YR2005 × CAPL

YR2006 × CAPL

YR2004 × CAPM

YR2005 × CAPM

YR2006 × CAPM

YR2004 × CAPS

YR2005 × CAPS

YR2006 × CAPS

Size

R2

CEO CEO 0.20 0.30 0.66 0.14 0.84 Fixed (2.49) (3.38) (6.39) (0.77) Effect 0.40 0.45 0.83 (5.67) (2.93) 0.20 0.25 0.51 0.23 0.35 0.75 0.13 0.31 0.77 0.13 0.84 (1.72) (1.96) (3.62) (1.78) (2.55) (5.04) (0.85) (1.91) (4.42) (0.75)

TFIVE CEO 0.18 0.24 0.54 0.06 0.79 Fixed (2.21) (2.69) (5.14) (0.32) Effect 0.32 0.31 0.79 (4.54) (2.00) 0.24 0.22 0.37 0.14 0.26 0.65 0.13 0.25 0.65 0.06 0.79 (1.98) (1.70) (2.60) (1.04) (1.82) (4.29) (0.80) (1.53) (3.65) (0.32)

Panel C: Dependent variable: Pension and Insurance

Fixed Effects YR2004 YR2005 YR2006

YR2004 × CAPL

YR2005 × CAPL

YR2006 × CAPL

YR2004 × CAPM

YR2005 × CAPM

YR2006 × CAPM

YR2004 × CAPS

YR2005 × CAPS

YR2006 × CAPS

Size

R2

CEO CEO 0.18 0.21 0.21 -0.15 0.85 Fixed (2.42) (2.44) (2.07) (-0.86) Effect 0.01 0.07 0.85 (0.17) (0.49) 0.21 0.13 0.23 0.23 0.31 0.21 0.07 0.21 0.16 -0.15 0.85 (1.84) (1.01) (1.69) (1.83) (2.29) (1.45) (0.49) (1.38) (0.95) (-0.86)

TFIVE CEO 0.14 0.12 -0.19 0.02 0.78 Fixed (1.55) (1.18) (-1.63) (0.08) Effect -0.31 0.14 0.78 (-3.91) (0.82) 0.21 0.01 -0.34 0.16 0.23 0.01 0.00 0.12 -0.26 0.02 0.78 (1.53) (0.09) (-2.11) (1.05) (1.49) (0.08) (0.00) (0.63) (-1.32) (0.10)

- 34 -

Panel D: Hypotheses Testing

Perks All Other Compensation Pension and Insurance Hypothesis F-Value Prob. F-Value Prob. F-Value Prob.

CEO ALL × (YR2006 - YR2005) = ALL × (YR2005 - YR2004) 28.80 0.00 4.06 0.04 0.07 0.79 CAPL × (YR2006 - YR2005) = CAPL × (YR2005 - YR2004) 4.31 0.04 1.14 0.29 1.02 0.31 CAPM × (YR2006 - YR2005) = CAPM × (YR2005 - YR2004) 13.15 0.00 1.74 0.19 0.73 0.39 CAPS × (YR2006 - YR2005) = CAPS × (YR2005 - YR2004) 14.73 0.00 1.32 0.25 0.65 0.42 CAPL × (YR2006 - YR2005) = CAPM × (YR2006 - YR2005) 1.44 0.23 0.72 0.40 1.54 0.21 CAPM × (YR2006 - YR2005) = CAPS × (YR2006 - YR2005) 1.27 0.26 0.11 0.74 0.05 0.82

TFIVE ALL × (YR2006 - YR2005) = ALL × (YR2005 - YR2004) 36.57 0.00 3.26 0.07 4.27 0.04 CAPL × (YR2006 - YR2005) = CAPL × (YR2005 - YR2004) 7.49 0.01 0.70 0.40 0.49 0.48 CAPM × (YR2006 - YR2005) = CAPM × (YR2005 - YR2004) 21.33 0.00 1.67 0.20 1.57 0.21 CAPS × (YR2006 - YR2005) = CAPS × (YR2005 - YR2004) 10.19 0.00 1.15 0.28 3.00 0.08 CAPL × (YR2006 - YR2005) = CAPM × (YR2006 - YR2005) 3.22 0.07 2.07 0.15 0.47 0.49 CAPM × (YR2006 - YR2005) = CAPS × (YR2006 - YR2005) 0.00 0.97 0.00 0.99 0.52 0.47

- 35 -

TABLE 5 Changes in “Monetary” Compensation over Time

The table presents results of balanced-panel fixed effects regressions of the natural logarithm of monetary compensation in 2003-2006. Monetary compensation is a measure of the non-perquisite components of compensation. In 2006 it is the sum of salary, bonus, non-equity incentive plan compensation, deferred compensation earnings reported as compensation, and other compensation. In 2003- 2005 it is the sum of salary, bonus and long-term incentive payouts. The sample comprises 361 S&P 1500 firms that filed their proxy statement with the SEC between January 2007 and August 2007. YR2004, YR2005 and YR2006 are year dummies. CAPL is an indictor variable equal to one if the firm is in the S&P 500. CAPM is an indicator variable equal to one if the firm is in the S&P MidCap 400. CAPS is an indicator variable equal to one if the firm is in the S&P SmallCap 600. “Sales” is the natural logarithm of total sales. Errors are clustered at the firm level. t-statistics appear in parentheses below the estimates.

Panel A: Dependent variable: Monetary Compensation

Fixed Effects YR2004 YR2005 YR2006

YR2004 × CAPL

YR2005 × CAPL

YR2006 × CAPL

YR2004 × CAPM

YR2005 × CAPM

YR2006 × CAPM

YR2004 × CAPS

YR2005 × CAPS

YR2006 × CAPS

Sales

R2

CEO CEO 0.13 0.17 0.19 0.35 0.93 Fixed (3.51) (4.22) (3.96) (4.31) Effect 0.03 0.53 0.93 (1.08) (7.52) 0.11 0.17 0.18 0.17 0.22 0.23 0.10 0.10 0.14 0.35 0.93 (1.98) (2.93) (2.79) (2.82) (3.55) (3.36) (1.43) (1.36) (1.73) (4.30)

TFIVE CEO 0.11 0.16 0.13 0.31 0.92 Fixed (4.15) (5.23) (3.92) (5.28) Effect 0.00 0.47 0.92 (-0.02) (9.19) 0.11 0.19 0.13 0.13 0.16 0.15 0.07 0.09 0.11 0.32 0.92 (2.86) (4.36) (2.83) (2.97) (3.56) (3.12) (1.43) (1.71) (1.85) (5.30)

- 36 -

Panel B: Hypotheses Testing

Monetary

Hypothesis F-Value Prob.

CEO ALL × (YR2006 - YR2005) = ALL × (YR2005 - YR2004) 0.33 0.57

CAPL × (YR2006 - YR2005) = CAPL × (YR2005 - YR2004) 0.44 0.51

CAPM × (YR2006 - YR2005) = CAPM × (YR2005 - YR2004) 0.29 0.59

CAPS × (YR2006 - YR2005) = CAPS × (YR2005 - YR2004) 0.11 0.74

CAPL × (YR2006 - YR2005) = CAPM × (YR2006 - YR2005) 0.00 0.99

CAPM × (YR2006 - YR2005) = CAPS × (YR2006 - YR2005) 0.14 0.71

TFIVE ALL × (YR2006 - YR2005) = ALL × (YR2005 - YR2004) 2.71 0.10

CAPL × (YR2006 - YR2005) = CAPL × (YR2005 - YR2004) 3.92 0.05

CAPM × (YR2006 - YR2005) = CAPM × (YR2005 - YR2004) 0.40 0.53

CAPS × (YR2006 - YR2005) = CAPS × (YR2005 - YR2004) 0.00 0.97

CAPL × (YR2006 - YR2005) = CAPM × (YR2006 - YR2005) 0.68 0.41

CAPM × (YR2006 - YR2005) = CAPS × (YR2006 - YR2005) 0.15 0.70

- 37 -

TABLE 6 Cross Sectional Determinants of Perks

The sample includes 361 S&P 1500 firms that filed their proxy statement with the SEC between January 2007 and August 2007. The table pre-sents regressions of various measures of 2006 perquisites on firm characteristics. The amounts of perquisites are hand-collected from the firms’ proxy statements. “FCF” is the decile ranking within the sample of free cash flow (operating income before depreciation minus the sum of interest, taxes paid, and capital expenditures). “Growth” is sales growth over the year. “CEO centrality” is the ratio of the CEO’s total compensation (ex-cept perks) to the top-five total compensation (except perks). “RET” is the stock return in 2006. “MTB” is the industry-adjusted market value of assets divided by the book value of assets minus the three-digit SIC industry average, where market value of assets equals the book value of assets plus the market value of common equity less the sum of the book value of common equity and balance sheet deferred taxes. “Size” is the decile ranking of the market capitalization of the firm. t-statistics appear in parentheses below the estimates.

Dependent Intercept FCF GROWTH CEO Central-

ity RET MTB

SIZE R2 CEO Perks 2.14 -0.18 -0.01 0.21 0.09

(10.75) (-0.40) (-0.37) (5.90) 3.58 0.16 -1.39 -0.07 -0.01 0.08 0.12 (4.92) (2.39) (-2.21) (-0.16) (-0.28) (1.25) 3.58 0.15 -1.46 0.13 -0.15 -0.01 0.05 0.13 (4.96) (2.22) (-2.35) (2.44) (-0.33) (-0.31) (0.75) 3.67 0.18 -1.51 0.13 0.13 (5.29) (4.79) (-2.49) (2.66) Travel Perks 0.83 0.33 -0.03 0.20 0.09 (4.14) (0.73) (-0.78) (5.60) 2.16 0.14 -1.30 0.43 -0.02 0.09 0.11 (2.96) (2.10) (-2.06) (0.94) (-0.59) (1.34) 2.14 0.12 -1.45 0.24 0.40 -0.02 0.03 0.17 (3.02) (1.79) (-2.37) (4.77) (0.91) (-0.65) (0.44) 2.21 0.14 -1.45 0.25 0.16 (3.23) (3.83) (-2.42) (4.94)

- 38 -

Dependent Intercept FCF GROWTH CEO Central-

ity RET MTB

SIZE R2 Top Perks 3.45 -0.13 -0.05 0.18 0.07 Five (16.94) (-0.28) (-1.35) (4.86)

5.20 0.10 -1.62 0.03 -0.04 0.09 0.09 (7.05) (1.54) (-2.54) (0.06) (-1.25) (1.38) 6.70 0.08 -1.77 -0.18 -0.04 -0.04 0.09 0.11 (7.30) (1.27) (-2.80) (-2.71) (-0.08) (-1.00) (1.34) 6.99 0.16 -1.87 -0.19 0.10 (7.89) (4.32) (-3.02) (-2.86) Travel Perks 1.56 0.04 -0.03 0.20 0.06 (6.85) (0.07) (-0.64) (4.78) 3.37 0.13 -1.71 0.15 -0.01 0.09 0.09 (4.07) (1.70) (-2.39) (0.30) (-0.37) (1.21) 5.00 0.11 -1.87 -0.20 0.08 0.00 0.09 0.10 (4.85) (1.44) (-2.64) (-2.61) (0.17) (-0.12) (1.17) 5.05 0.18 -1.87 -0.20 0.10 (5.08) (4.49) (-2.68) (-2.62)

- 39 -

TABLE 7

Abnormal Stock Returns around Proxy Statement Filing Dates

The table presents mean cumulative abnormal stock returns, in percent, for a sample of 361 S&P 1500 firms that filed their proxy statements with the SEC between January 2007 and August 2007. The event date, day 0, is the date on which the 2006 proxy statement is filed electronically with the SEC (in 2007). Cumulative abnormal returns in column (-i,+j) are calculated over the interval beginning i days prior to the event day and con-tinuing until j days later. Panel A reports results for the entire sample and separately for the firms that disclose perks for the first time and the other firms. Panel B further separates the firms that disclose perks for the first time into four groups, based on the quartiles of the ratio of the newly dis-closed perks to the firm’s market capitalization. Abnormal stock returns are calculated using standard market model methodology.

Panel A: By Firm Size

% N (-5,+5) (-5,+1) (-5,+10)

All 361 -0.595 -0.455 -0.693 (-2.10) (-1.89) (-1.93)

First Time Disclosures 120 -1.771 -1.340 -1.898 (-2.80) (-2.44) (-2.57)

Non- First Time Disclosures 241 -0.141 -0.113 -0.229 (-0.46) (-0.44) (-0.57)

- 40 -

Panel B: First Time Disclosures by Perk Magnitude

Quartile N (-5,+5) (-5,+1) (-5,+10)

1 - Low 30 -0.668 -0.469 -0.598 (-0.86) (-0.92) (-0.73)

2 30 -0.652 -0.679 -1.682

(-0.74) (-0.88) (-1.54)

3 30 -2.27 -2.091 -2.57

(-1.69) (-1.59) (-1.40)

4- High 30 -4.794 -2.977 -4.226 (-2.10) (-1.46) (-1.76)

- 41 -

FIGURE 1 Summary Compensation Table Format Change

Panel A: Summary Compensation Table – Old Format

Annual Compensation Long-Term Compensation Name and Principal Position

Year Salary Bonus Other RS Options LTIP Payout

All Other

Compensation

CEO

A

B

C

D

Panel B: Summary Compensation Table – New Format

Name and Principal Position Year Total Salary Bonus Stock

Awards

Option

Awards

Non-Stock

Incentive Plan

Compensation

All Other

Compensation

CEO

CFO

A

B

C

- 42 -

FIGURE 2

Abnormal Stock Returns around Proxy Statement Filing Dates for First Time Disclosures of Perks

The figure shows mean cumulative abnormal stock returns for 361 firms that filed their proxy statements between January 2007 and August 2007. The event date, day 0, is the date on which the proxy statement is filed with the SEC.

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

days

CA

R

Non First-Time

First Time

- 43 -

FIGURE 3 Abnormal Stock Returns around Proxy Statement Filing Dates for First Time Disclosures of Perks by Percentage of Perks of

Total Firm Value

The figure shows mean cumulative abnormal stock returns for 361 firms that filed their proxy statements between January 2007 and August 2007. The event date, day 0, is the date on which the proxy statement is filed with the SEC. 1-4 are the quartile ranking of total perks paid deflated by market cap.

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

days

CA

R

Low - 1 2

3 High - 4

- 44 -

APPENDIX Additional “All other compensation” items

CEOs only Top Five

Type of Perk Mean Median Max Freq. Mean Median Max Freq. Additional Perk Items Boat Usage 0.4 0.0 156.5 0.27% 0.5 0.0 197.9 0.28%Travel Expenses 0.6 0.0 132.0 3.01% 1.5 0.0 222.0 5.54%Spousal/Guest Travel 0.1 0.0 16.5 1.37% 0.7 0.0 84.0 3.32%Parking 0.0 0.0 6.4 1.91% 0.2 0.0 25.3 1.94%Medical/Dental Benefits 0.5 0.0 38.7 5.46% 2.3 0.0 110.2 8.03%Physical Exam 0.1 0.0 8.1 5.46% 0.6 0.0 25.3 9.97%Housing Expenses 0.5 0.0 150.0 1.09% 1.5 0.0 150.0 3.60%Renewal Commissions from Previous Jobs 0.0 0.0 0.0 0.00% 1.1 0.0 401.6 0.28%Expatriate Benefits 0.0 0.0 0.0 0.00% 9.0 0.0 1,142.7 1.94%Retirement/Holiday Gift 0.0 0.0 0.5 0.82% 0.0 0.0 1.2 0.83%Personal Services of Employees 0.6 0.0 130.6 1.09% 1.0 0.0 232.9 0.83%Consulting Fees 0.0 0.0 8.3 0.55% 0.6 0.0 112.5 1.11%Reimbursement of Interest Exp. 0.7 0.0 143.0 0.82% 2.4 0.0 235.7 3.05%Company Merchandise 0.1 0.0 25.3 0.55% 0.2 0.0 48.4 0.55%Charitable Contribution 0.2 0.0 46.6 0.55% 1.1 0.0 200.0 1.66%Legal Fees 0.5 0.0 108.5 2.19% 0.8 0.0 108.5 2.49%Gift Reimbursement 0.2 0.0 50.0 0.55% 0.2 0.0 50.0 0.83%Commuting Expenses 0.0 0.0 7.0 0.82% 0.2 0.0 30.8 1.11%Meals and/or Entertainment 0.2 0.0 28.0 1.37% 0.3 0.0 33.8 1.94%

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CEOs only Top Five

Type of Perk Mean Median Max Freq. Mean Median Max Freq. Reimbursement for Home Office Supplies 0.0 0.0 0.0 0.00% 0.0 0.0 7.7 0.28%Living Expense Reimbursement 0.0 0.0 0.0 0.00% 0.0 0.0 12.3 0.28%Rep. Allow. for Unreimbursed Business Exp. 0.0 0.0 0.0 0.00% 0.0 0.0 1.9 0.28%Education Fund 0.1 0.0 26.2 0.27% 0.2 0.0 75.3 0.28%Phone Exp. 0.0 0.0 2.9 0.27% 0.1 0.0 22.7 0.28%20% Fed Tax Assit. On Rest. Stock Vest 0.2 0.0 78.5 0.27% 0.4 0.0 131.9 0.28%Advance Under Co. Exec. Retention Program 0.0 0.0 0.0 0.00% 0.0 0.0 2.6 0.28%Prior Obligation Expense 0.0 0.0 0.0 0.00% 5.8 0.0 2,000.0 0.55%

Additional Pension Item 0.0 0.0 0.0 0.0 0.0 9.0 Pension Plan Trustee Fee 0.0 0.0 0.0 0.00% 1.1 0.0 387.0 0.28%

Additional Insurance Item 0.4 0.0 156.5 0.5 0.0 197.9 Guardian Redemption Distribution 0.6 0.0 132.0 0.00% 1.5 0.0 222.0 0.28%