On July 2, the SEC announced that The Dow Chemical Company agreed to settle charges related to the company’s inadequate perquisites disclosure in SEC filings by paying a civil penalty in the amount of $1.75 million, hiring an independent consultant to evaluate and recommend changes to the company’s policies and procedures relating to perquisites disclosure, and implementing such changes.

The SEC’s order finds that from 2011 through 2015, Dow did not ensure that approximately $3 million in executive perquisites were adequately evaluated and disclosed as “other compensation” in the Compensation Discussion & Analysis (CD&A) section of its annual proxy statements. These authorized but undisclosed perquisites included personal use of the Dow aircraft and other expenses.

SEC’s Definition Regarding Perquisites Disclosure

Although Dow applied procedures regarding the evaluation and disclosure of its executives’ perquisites, Dow did not follow the SEC’s standard regarding disclosure of perquisites, which provides that:

  • An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
  • Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect without regard to whether it may be provided for some business reason or for the convenience of the company unless it is generally available on a non-discriminatory basis to all employees.

Instead, Dow used a business purpose test, which the SEC considered, but ultimately decided not to adopt when it issued new disclosures rules in 2006.

Pursuant to the order, Dow agreed to cease and desist from violating proxy disclosure and reporting rules. Dow further agreed to hire an independent consultant to help it implement improved policies and procedures to ensure that perquisites are accurately reported in the future.

SEC Interpretive Guidance on Perquisites Disclosure

Generally speaking, a perquisite is a special benefit for executives and directors that are usually non-cash items. It is something gained over and above the ordinary salary or fixed wages for services rendered. However, whether the company should pay for an expense or it is deductible for tax purposes relates principally to questions of state law regarding use of corporate assets and of tax law; whereas the SEC’s executive compensation disclosure requirements are triggered by different and broader concepts.

As background on this topic, the excerpt below from the SEC’s 2006 adopting release helps to explain how the test is applied:

The concept of a benefit that is “integrally and directly related” to job performance is a narrow one. The analysis draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit. Some commenters objected that “integrally and directly related” is too narrow a standard, suggesting that other business reasons for providing an item should not be disregarded in determining whether an item is a perquisite. We do not adopt this suggested approach. As we stated in the Proposing Release, the fact that the company has determined that an expense is an “ordinary” or “necessary” business expense for tax or other purposes or that an expense is for the benefit or convenience of the company is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes. Whether the company should pay for an expense or it is deductible for tax purposes relates principally to questions of state law regarding use of corporate assets and of tax law; our disclosure requirements are triggered by different and broader concepts.

As we noted in the Proposing Release, business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job. Therefore, for example, a company’s decision to provide an item of personal benefit for security purposes does not affect its characterization as a perquisite or personal benefit. A company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.

If an item is not integrally and directly related to the performance of the executive’s duties, the second step of the analysis comes into play. Does the item confer a direct or indirect benefit that has a personal aspect (without regard to whether it may be provided for some business reason or for the convenience of the company)? If so, is it generally available on a non-discriminatory basis to all employees? For example, a company’s provision of helicopter service for an executive to commute to work from home is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis. As we have noted, business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.

A company may reasonably conclude that an item is generally available to all employees on a non-discriminatory basis if it is available to those employees to whom it lawfully may be provided. For this purpose, a company may recognize jurisdictionally based legal restrictions (such as for foreign employees) or the employees’ “accredited investor” status. In contrast, merely providing a benefit consistent with its availability to employees in the same job category or at the same pay scale does not establish that it is generally available on a non-discriminatory basis to all employees.

Applying the concepts that we outline above, examples of items requiring disclosure as perquisites or personal benefits under Item 402 include, but are not limited to: club memberships not used exclusively for business entertainment purposes, personal financial or tax advice, personal travel using vehicles owned or leased by the company, personal travel otherwise financed by the company, personal use of other property owned or leased by the company, housing and other living expenses (including but not limited to relocation assistance and payments for the executive or director to stay at his or her personal residence), security provided at a personal residence or during personal travel, commuting expenses (whether or not for the company’s convenience or benefit), and discounts on the company’s products or services not generally available to employees on a non-discriminatory basis.

A link to the SEC’s order is here.

Takeaway: Always Ensure That the Proper Standard is Applied for Perquisites Disclosure

This recent SEC enforcement action against The Dow Chemical Company for its perquisites disclosure serves as a reminder to all public companies to ensure that employees responsible for executive compensation disclosures in the proxy statement are adequately trained on the proper SEC standard for perquisites disclosure. In particular, the SEC’s order stated, “Dow did not adequately train employees in key roles, including those tasked with drafting the CD&A section of the proxy statement and compiling the executive compensation tables, to ensure that the proper standard was applied for perquisites disclosure.”

It is also worth noting that the SEC’s perquisite standard is not hardwired into the compensation rules, rather it is found in interpretive guidance, such as in the SEC’s 2006 adopting release. I suspect this omission from the rules themselves likely contributes to employees missing this nuance when performing a form check on the proxy statement.

Even with the SEC’s interpretive guidance, significant grey areas remain. This further underscores the importance of proper training to ensure that those responsible for preparing the CD&A tables will pick up on this issue and bring it to the attention of the company’s securities lawyers for further analysis.