Disclosure over executive security arrangements continues to be in the spotlight, with SEC Chairman Paul Atkins recently stating that the modernization of Item 402 of Regulation S-K likely will include tackling this topic. Some companies argue that executive security expenses should not be considered perquisites at all because they are directly tied to business operations and executive safety. The SEC has not yet resolved this tension, particularly regarding aircraft use versus other security measures.
Here’s the current state of play about this type of disclosure:
1. Prevalence of Executive Perks: Despite scrutiny, perks remain common. Approximately 70% of the S&P 500 – and 43% of the Russell 3000 – disclose executive perquisites. The most common perks at large companies are personal use of corporate aircraft and executive security services.
2. Rapid Growth in Executive Security Spending: Personal security services (home security, cybersecurity, security personnel, travel security) are increasing in prevalence and cost. Disclosure rates show 64% of the S&P 100, 35% of the S&P 500 – and 10% of the Russell 3000 provide executive security services, with expectations of continued growth.
3. ISS’s Evolving Position on Security Perks: While ISS historically cited security expenses critically in negative Say-on-Pay recommendations, it recently relaxed its stance. ISS now indicates it is unlikely to raise significant concerns if companies provide robust proxy disclosure explaining the rationale and assessment process behind security programs.
4. Disclosure Expectations from Proxy Advisors: Adequate disclosure should describe:
- The nature of the security program
- The benefit to stockholders
- The internal or third-party security assessment
- The arm’s-length decision-making process
5. Early Governance Involvement Is Critical: Companies anticipating significant security costs should involve the compensation committee and relevant executives early to establish a robust assessment and approval process. Clear disclosure of that process in the CD&A is key to mitigating proxy advisor criticism.
6. Tax and Structural Constraints of Aircraft Programs: Personal aircraft use frequently overlaps with company security policies, which may require executives to use corporate or private aircraft for both business and personal travel. These arrangements are often justified as security-driven rather than discretionary benefits. Security-driven aircraft policies may require an “all-or-nothing” approach under tax rules, meaning companies cannot selectively classify certain flights as security-related. This constraint is often misunderstood and should be explained in disclosure.
