In widely publicized enforcement actions against Tyson Foods and General Electric Company, and recent speeches by members of the staff, the SEC has emphasized the need to accurately and clearly identify, characterize, value and disclose executive perquisites and other personal benefits.


Item 402(b) of Regulation S-K requires that the value of perquisites and personal benefits be included in the “Other Annual Compensation” column of the Summary Compensation Table in the annual proxy statement, but only if the aggregate amount exceeds the lesser of $50,000 or 10% of the executive’s total annual salary and bonus. If the value of an individual perquisite exceeds 25% of the total perquisites reported for the executive, that perquisite must be identified by type and amount in a footnote or accompanying narrative. Perquisites must be valued on the basis of the aggregate incremental cost to the company. The SEC rules do not provide any guidance for determining the “aggregate incremental cost” of perquisites.

Section 13(b) of the Securities Exchange Act of 1934 requires issuers to maintain a system of internal controls that assures that transactions are executed, and that access to assets is permitted only, in accordance with management’s authorization.

Tyson Foods

Donald Tyson became the company’s President in 1966 and served as CEO from 1967 to 1991, Chairman from 1967 to 1995 and Senior Chairman from 1995 to 2001. During his tenure, the company’s revenues increased from $51 million to more than $10 billion. He continues to serve as a director and as a member of the Executive Committee of the Board of Directors.

The SEC charged that the company’s proxy statements for 1997 to 2003:

  • failed to disclose certain perquisites provided to Mr. Tyson;
  • mischaracterized other perquisites as “performance-based bonuses” or as “travel and entertainment;” and
  • failed to properly quantify and separately disclose other benefits.

The SEC also charged that the company failed to maintain a system of internal accounting controls over personal use of assets sufficient to detect, prevent or account properly for and disclose Mr. Tyson’s use of company assets. Finally, the SEC charged Mr. Tyson with causing and aiding and abetting the company’s disclosure failures.

From 1997 to 2001, perquisites valued at $424,121 (including housekeeping, lawn maintenance, automobile maintenance and telephone services) were omitted altogether.

An additional $596,656 of perquisites and the tax gross-up thereon were omitted as part of the company’s tax strategy to deduct Mr. Tyson’s entire compensation. Because the value of Mr. Tyson’s salary plus perquisites exceeded the $1 million deductible under Section 162(m) of the Internal Revenue Code, the company’s tax accountant advised the Compensation Committee to award Mr. Tyson a bonus under the company’s executive bonus plan in the amount by which his salary and perquisites exceeded $1 million. The amount of the “bonus” was then disclosed in the “Bonus” column of the Summary Compensation Table, rather than the “Other Annual Compensation” column appropriate for perquisites. By mischaracterizing these amounts, the company created the impression that they were earned by Mr. Tyson’s performance.

The perquisites that were disclosed were characterized as “travel and entertainment,” including $372,539 in the form of payment of personal expenses through cash advances and use of company credit cards, personal use of company homes, personal use of company aircraft and housekeeping. In certain years, the value of individual perquisites exceeded 25% of the total perquisites and, accordingly, should have been separately disclosed by type and amount.

Upon his retirement in 2001, the company and Mr. Tyson entered into a retirement agreement under which Mr. Tyson was entitled to receive “travel and entertainment costs, as well as his estimated income tax liability with respect thereto, consistent with past practices.” The agreement was filed as an exhibit to the company’s 2001 Form 10-K.

The company’s proxy statements for 2002 and 2003 quoted the retirement agreement, but did not describe the nature and scope of the perquisites. In his first two years of retirement, Mr. Tyson received $1.1 million in perquisites which were mischaracterized as “travel and entertainment costs” and associated tax gross-ups.

Based on these facts, the SEC charged that the company had failed to properly disclose certain perquisites provided to Mr. Tyson, as required by Item 402(b).

The SEC also noted that, due to internal control failures, personal benefits and perquisites totaling approximately $1.5 million were neither raised with nor authorized by the Compensation Committee or the Board of Directors.

Finally, the SEC charged that Mr. Tyson’s acts and omissions were a cause of the company’s misleading disclosures. Mr. Tyson signed annual questionnaires which disclosed only that he had received “travel and entertainment” costs from the company. He delegated to others the responsibility to prepare the questionnaires, did not read the questionnaires or the proxy statements, and failed to take any other action to ensure the accuracy of the company’s disclosure of his perquisites and benefits.

In settling the charges, and without admitting or denying the charges, the company paid a $1.5 million penalty, Mr. Tyson paid a $700,000 penalty, and both consented to the entry of an order that it cease and desist from violating the proxy solicitation and the periodic reporting requirements of the Exchange Act. See In The Matter of Tyson Foods, Inc. and Donald Tyson, Release No. 34-51625 (April 28, 2005). In addition, Mr. Tyson had already paid the company $1.516 million for certain items identified in an investigation by the independent directors.

Initially, the SEC staff advised the company that it was considering recommending that the SEC bring administrative actions against two non-executive employees for causing these failures. The staff subsequently withdrew its proposed recommendations with respect to these employees. With its limited budget, the SEC can be expected to increasingly rely on those employees charged with preparing periodic reports, as well as directors, inside counsel and outside counsel, to be the gatekeepers of the disclosure system.

General Electric

Jack Welch joined General Electric in 1960 and rose from an entry level position to Chairman and Chief Executive Officer. He held these positions from 1981 to his retirement in 2001. During his first 15 years as Chairman and CEO, GE’s market capitalization increased by more than $150 billion.

In 1996, GE and Mr. Welch entered into an employment and post-retirement consulting agreement under which Mr. Welch was entitled to receive, “for the remainder of his life, continued access to company facilities and services comparable to those provided to him prior to his retirement, including access to company aircraft, cars, office, apartments, and financial planning services.” The agreement was filed as an exhibit to GE’s 1996 Form 10-K and was incorporated by reference in each subsequent Form 10-K until the year following Mr. Welch’s retirement.

GE’s proxy statements for 1997 through 2002, which were incorporated by reference into the company’s Form 10-Ks, did not describe or quantify the retirement benefits, except to say that ” . . . the Board agreed . . . to provide him continued lifetime access to company facilities and services comparable to those which are currently made available to him by the company.”

In his first year of retirement, Mr. Welch received approximately $2.5 million in benefits under this agreement, including: unlimited personal use of GE aircraft valued at $1.2 million; exclusive use of a furnished New York City apartment with a rental value of approximately $50,000 a month and a resale value in excess of $11 million; unrestricted access to a chauffeured limousine; a leased Mercedes Benz; office space in both New York City and in Connecticut; professional estate and tax advisors; a personal assistant; television, fax, phone and computer systems at his homes, with technical support; bodyguards for various speaking engagements, including a book tour to promote his autobiography; and installation of a security system in one of his homes and continued maintenance of security systems GE previously installed in three of his other homes.

The SEC charged that GE violated the proxy solicitation and periodic reporting provisions of the Exchange Act by filing with the SEC proxy statements and annual reports that failed to fully and accurately disclose the facilities and services Mr. Welch would receive in retirement in a manner that allowed investors to understand the nature and scope of the retirement benefits.

In settling the charges, GE consented, without admitting or denying the charges, to the entry of an order that it cease and desist from violations of the Exchange Act. See In the Matter of General Electric Company, Release No. 34-50426 (September 23, 2004).

In its final order, the SEC pointedly noted that the misleading proxy statements had been prepared and reviewed by GE’s securities law counsel, and that the disclosures had been incorporated by reference in GE’s Form 10-Ks which were signed by a majority of GE’s directors.

Today, GE’s executive compensation disclosures are generally considered among the most detailed and readable. See GE’s 2005 proxy statement. A recent Form 8-K shows how far GE has come in its disclosure of the use of company aircraft.

SEC Speeches

In October 2004, Alan L. Beller, the Director of the Division of Corporation Finance, gave a speech which focused on executive compensation. Mr. Beller’s comments included the following:

  • An important part of the directors’ responsibilities is to oversee and properly incentivize and reward management.
  • Too many boards operate on the principle that compensation must be in the top half or even the top quartile of some benchmark group, which produces the Lake Wobegone effect, where everyone is above average.
  • Too many issuers and their advisors have followed a pattern of opaque or unhelpful disclosure, saying as little as possible, rather than seeking to inform.
  • The Compensation Committee must understand each element of executive compensation, the role each plays in motivating short-term and long-term performance, the cost of each and the total cost.
  • The SEC’s rules require, and the Compensation Committee is responsible for, the clear, concise and understandable disclosure of all executive compensation.
  • All compensation must be disclosed even if “literal compliance” with SEC rules does not require it.
  • Inside and outside counsel must remember that their client is the company and not its management in deciding what should be disclosed.
  • Personal use of company aircraft and automobiles should be disclosed.
  • Serious consideration should be given to properly characterizing many items as perquisites which often are called business expenses (e.g., housing, security systems, automobiles).
  • The valuation of perquisites should be carefully examined. The appropriate measure of value is the aggregate incremental cost to the company, not the tax value of the benefit.
  • Material deficiencies in disclosure of executive compensation expose companies to potential enforcement actions, citing the proceeding against GE and Mr. Welch.
  • Compensation Committee reports should avoid boilerplate. Many committees would benefit from taking a fresh look at their reports.
  • There needs to be better focus on long-term performance, rather than short-term results or limited specific measures.
  • The staff is re-examining numerous aspects of its rules regarding executive compensation, including categorizing and valuing perquisites, disclosure of deferred compensation, supplemental retirement, severance and change-in-control provisions, and disclosure of related party transactions.


The lessons coming from the SEC’s enforcement actions against Tyson and GE, and recent speeches by the SEC’s staff, include:

  • The value of all perquisites and personal benefits must be identified, quantified and disclosed, subject to the de minimis exception of Item 402(b).
  • Perquisites must be described with sufficient specificity and clarity so that stockholders can understand the nature and scope of the benefits.
  • The nature and amount of any substantial perquisites should be reported to and authorized by the Compensation Committee or the Board of Directors.
  • Compensation Committees should require a tally sheet that identifies and values individually each element of compensation, including salary, bonus, perquisites and benefits, provided to current and former executives.
  • The tally sheets should include both the incremental cost to the company and the true value to the executive of each perquisite.
  • The true value of non-cash perquisites, including personal use of company aircraft, limousines and apartments, must be disclosed.
  • The appropriate measure of value is the aggregate incremental cost to the company, not the tax value of the benefits.
  • Those responsible for compensation disclosure – including employees, members of the Compensation Committee and outside lawyers and advisors – may face personal liability for inaccurate or incomplete disclosure.
  • Directors and executives are responsible for ensuring that their annual questionnaires and the proxy statement disclosure of their compensation are complete and accurate.
  • Distinguish between business expenses and perquisites. Mr. Beller has suggested that one test is whether the expense is available to employees generally on a non-discretionary basis (reimbursement for a taxi across town for a meeting) or whether it is a benefit for a chosen few (commuting on a company aircraft to a personal residence).
  • Disclose the specific method of valuing personal use of company aircraft.
  • The annual Compensation Committee report should not be boilerplate, but should describe executive compensation policies, the specific relationship of corporate performance to executive compensation, and each measure of company performance on which CEO compensation is based.

For further information on the SEC rules regarding executive perquisites, please contact Peter M. Menard at (213) 617-5483.