20% of companies pick up CEOs' taxes on perks

CEOs are just like the rest of us: They hate paying for things out of pocket if they can find someone else to foot the bill.

Fortunately for them, in many cases there is someone willing to pick up the bill for selected personal expenses: the shareholders.

A new study from The Corporate Library finds that the most common form of perk being granted to CEOs these days is something called a tax "gross-up." In plain English, it means that a company pays the taxes owed by the CEO on benefits granted by the company.

The Corporate Library, a shareholder watchdog group, found that 20% of major American companies, or 657 of nearly 3,300 examined, picked up the tab on at least one tax owed by the CEO.

"We are sure that many U.S. workers would be grateful if their employers also paid their income tax obligations," writes Paul Hodgson of The Corporate Library in the report.

Almost any perk granted to a CEO generates a tax bill, from an executive life insurance policy paid by the company to country club dues.

But one of the most common reasons cited by the report for tax "gross-ups" is use of the corporate jet. Since the Sept. 11 attacks, for security reasons, the boards of many companies have encouraged their CEOs to fly on private jets rather than commercial airlines when traveling on business. Public companies often allow the CEOs to use the corporate jet for personal travel as well.

Personal use of the company plane is a form of compensation to the executive, so it generates a tax liability. But rather than making the CEO pay tax on that benefit, dozens of companies in the Russell 3000 pick up the tax bill.

The Corporate Library report singles out Ryland Group (RYL), a home-building company, as the biggest provider of "gross-up" payments to its CEO. For 2007, Ryland provided CEO R. Chad Dreier with $4 million in gross-ups as part of a pay package that totaled $12 million. Ryland did not return calls for comment.

Revelations about corporate perks can create ill will among investors, says Ira Kay of the compensation consulting firm Watson Wyatt.

"We advise our clients to minimize perks as much as possible," he says. "It's an irritant to shareholders and a distraction from incentive plans that work well."

Alan Johnson of Johnson & Associates suggests that many companies maintain a corporate jet primarily to accommodate the CEO, or, if the company already has a corporate jet that's used for business, a CEO's needs can lead the company to lease another jet.

Some companies, such as General Mills (GIS), have canceled the personal-use-of-the-corporate-jet perk. It's a trend that's likely to grow, says Watson Wyatt's Kay.

Hodgson agrees. "There are more boards who are less happy paying for quite so many perks now that they've been exposed," he says. "I'm expecting a reduction in number and range of perks being paid."

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