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An Unfair Rap For CEO Perks?


Traditional theory in corporate finance teaches that executive perks are signs of excess that don't help a company. Private jets, chauffeured limos, and other nonmonetary rewards, it is argued, are wasteful spending that neither boosts productivity nor motivates managers. Is the theory wrong?

Amid juicy tales of misappropriation by ex-Tyco International (TYC) CEO L. Dennis Kozlowski and others, a new study by Raghuram G. Rajan at the International Monetary Fund and Julie Wulf at the Wharton School offers surprising findings. The researchers analyzed confidential info from compensation consultants Hewitt Associates Inc. (HEW); the data covered 300 large U.S. corporations from 1986 to 1999. As it turns out, those that offer more perks than others don't always fit the classic profile -- companies with much free cash flow and few prospects. For example, of the 14 industries ranked by the authors, No.2 is communications (table), a highly competitive sector with ample room to grow.

Equally important, the researchers argue, a blanket indictment of perks is unwarranted. They find that companies offer perks for reasons other than the private benefit of the recipient. Those include the lift that perks can supply to managerial productivity, which also benefits the company. For example, Rajan and Wulf show that larger outfits offer their CEOs company planes when that can save time. Company jets are less common at corporations headquartered in highly populated areas and close to major airports. Similarly, CEOs located in more densely populated regions with long commute times are the ones more likely to have chauffeur service provided.

The researchers also suggest that companies give perks to raise managers' effectiveness, since the status that comes with perks shows pecking order and conveys authority. And if CEOs value their standing in the company, then perks can motivate them more cost-effectively than the cash equivalent.

To be sure, the darker side of perks is that pure greed will never go away. But Rajan and Wulf's work suggests that the public outrage perks can create should be weighed against the added efficiency and managerial effectiveness they generate.

Large multinationals intend to put out the "help wanted" sign for larger numbers this year. What's more, they are looking for U.S. workers to fill most of the positions. Those findings are the results of a PricewaterhouseCoopers survey of senior executives at U.S. multinational companies.

The consulting firm's Management Barometer survey for the first quarter of this year showed 46% of the 177 respondents intend to increase their global workforce in the next 12 months. That's up from 37% a year ago. Among businesses that plan to hire, the average increase in payrolls is 4.4%.

The survey should help to allay fears that outsourcing is causing the U.S. to lose out on the hiring gains. More than 75% of the new jobs will be in the U.S., with the remainder in foreign countries. Nearly three-quarters of the intended hiring abroad is for the purpose of serving local markets, said executives. In other words, companies are responding to improving business prospects around the world, just as they are in the U.S., by adding workers to serve those markets. All in all, according to Management Barometer survey director Pete Collins, less than 7% of the planned hiring will have the potential to replace U.S. jobs.

On May 25, the Conference Board reported its confidence index rose to 93.2 in May, up from 93.0 in April. But the reading is still below those for December and January, in part, says the Board, because of higher gasoline prices and "escalating tensions overseas." That reasoning echoes research done by Robert Keyfitz, a senior economist at the World Bank. He found noneconomic factors, particularly the war in Iraq, can curb consumer confidence.

In an article in Business Economics, Keyfitz examined how economic and noneconomic factors accounted for the volatility in the confidence index from 2001 to 2003. Keyfitz created a proxy index for economic confidence, which used four components -- growth in real per capita income, stock prices, the jobless rate, and inflation. He subtracted that from the reported confidence data to create an index based on non-economic shocks such as the Iraq war. The economic proxy trended lower for most of the time (chart), but the noneconomic index swung sharply. In Keyfitz' view, "the deterioration in confidence is largely explained by noneconomic factors."

Keyfitz estimates that a 1% increase in the reported confidence index raises consumer spending by $1.1 billion, a relationship that holds true even when the attitude factors are not pocketbook issues. He calculates that "war jitters" and fears about weapons of mass destruction cut real consumer spending by $40.5 billion in 2002 and 2003, subtracting a small but still significant 0.3% from spending over the two years.


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