Security Excuse Abused for Use of Corporate Jets

A story in The New York Times points out security as one of the many reasons top company executives see corporate jets as a necessity.

As shareholders usually pick up the bill for what is often described as corporate extravagance, companies such as General Motors, Motorola and Time Warner say they require travel on corporate planes, emphasizing security since the terrorist attacks on Sept. 11, 2001.

However, the article states that many companies add a small amount of money to executive salaries for personal jet travel, and that figure is even lower when it is for what businesses call “security reasons,” which include personal usage.

Professor David Yermack of the Stern School of Business at New York University told the Times he is disappointed by these arrangements. In a study of 250 companies through 2002, he found that, once companies began reporting personal use of the corporate jet, their shareholder returns disappointed. He considers a footnote about security requirements a red flag that the board and the chief executive do not have arm's-length negotiations.

“It is like telling the CEO: 'We insist that you eat at a five-star restaurant for your own nutrition, and we insist that you drink $800 Champagne for your health,' ” he said.

Yet some companies have proven reasons for corporate jets as a security precaution. The Times reports that Exxon began requiring its executives to travel on corporate jets over a decade ago after the kidnapping and death of Sydney J. Reso, who oversaw the company's international operations.

Despite obvious risks, many critics still say that executives are well compensated, and use of private jets sends the wrong signal to other employees and diverts corporate resources.

“Personal use of corporate aircraft is almost always inappropriate,” Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, told the Times. “We pay them enough so that if they need to use private aircraft, let them charter it.”

By Paul Kerstein