What’s Wrong With A Company Paying for a CEO’s Family to Fly?
posted by Dave Hoffman
Michelle Leder, of Footnoted, was on NPR’s Marketplace yesterday. The story: the worst examples of agency-costs in footnotes in SEC filings in 2007. (She doesn’t sell it that way, but that’s what it is.)
Bloggers have highlighted a few of Michelle’s “best” finds, including Edward Mueller’s agreement, as CEO of Quest, to permit his family members to use the company plane to travel back and forth to California (where his family was based) to Denver (where Qwest is headquartered.) Although the story was hyped as permitting Mueller’s daughter to commute daily to school — something of a modern-day Leonard v. Pepsico, there is no evidence that the family plans to fly back and forth in this way.
But who cares anyway? Increasing numbers of high-level executives work far away from home, commuting to headquarters for parts of the week. (The consultants’ four day week, but permanently.) Encouraging them to do so maximizes shareholder wealth because it (presumably) allows recruitment of talent that wants to live elsewhere. Now the problem with these schemes is that it is taxing for the executive and her/his home life to be separated from the family. As Professor Joan Heminway explains here, personal turmoil in a CEO’s life can have materially adverse consequences for shareholder value, and well-run companies probably ought to do everything they can to make executives personally happy.
So why not pay for a family to commute back to California, to enable a family member to finish her last year of high school surrounded by friends, while coming “home” to Denver when possible? If that makes Mueller happy, and reduces the chance that he would live in California and commute to Denver, Qwest’s shareholders win. If the argument is simply that the CEO should pay for this travel out of his own pocket, the flight costs will be imputed as income to him under the agreement, so the economics are basically the same. Given disclosure, these kinds of perks should be seen simply as salary-substitutes, at worst, and as ways to reduce the chance of disruption by increasing the CEO’s chance of having a normal family life.
Dailykos (which originally brought the story to my attention) had this to say:
And as this president likes to remind us, this is the ownership society, so don’t be surprised to learn that some of your retirement funds are going to fuel up that jet so an execu-kid can zip off to the prom.
But this is plainly silly. Would we prefer that Qwest simply paid Mueller more money? Or not disclosed the behavior?
December 27, 2007 at 6:56 pm
Posted in: Contract Law & Beyond, Corporate Law, Culture, Current Events, Employment Law, Law and Inequality, Securities
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Responses (3)
A.J. Sutter - December 31, 2007 at 12:42 am
Seems to me that a fly in the ointment is the assertion that such a practice “maximizes shareholder wealth” (even assuming, for the nonce, that such maximization is attainable and is adequate justification for anything). How can you demonstrate that a particular CEO is necessary for maximizing shareholder wealth? Even if that person has the skillset, how can you demonstrate that the person will deploy that skillset in a profit maximizing way whilst flying all over heck? How can you even show that expanding the hiring pool to commuters is necessary for wealth maximization? These issues are highly multivariate, and one can’t do a controlled experiment.
Suppose we compare three CEOs — call them P, Q,and R — one of whom (P) lives with family near company HQ, one (Q) who commutes but is able spend most of his or her time with family (such as due to family’s flying back and forth), and one who commutes but is apart from his or her family (R). The conventional wisdom seems to be that P ≥ Q > R, when it comes to CEO performance (which, in turn, is measured by “shareholder wealth,” which in turn is usually measured by share price or by net income). Let’s also suppose this wisdom could be supported by statistical evidence based on studies of populations of CEOs (has it been?). Then that would simply be evidence of a correlation, not causation. For example, a company that chose to hire a commuting CEO but that couldn’t afford to accommodate his family (or thought it might be improper to do so) might have many other problems with its financial condition, or with the quality of its Board’s judgment, that could affect performance. (Here I’m also assuming for sake of argument that if share price is the metric of performance, that such price is in fact affected by such “fundamentals”).
Moreover, by hypothesis there is some individual Q for whom Q > P, given the pool of available candidates. How can this be known in advance? It can’t. How can it be known in retrospect? Again, it can’t, because you don’t know how any of the local candidates would have performed if you had hired them. And also because, albeit that CEOs like to claim credit for company performance, this is again too multivariate a problem for causation to be attributed reliably.
I suspect that hiring Q might be justified by (i) showing that statistically, there isn’t much difference between hiring resident and contented commuter CEOs (again, I’m assuming this for the sake of argument), and (ii) claiming that this particular Q is, in the Board’s judgment, the best candidate for the job, and is worth the extra money. The company’s PR folks should be able to put the best spin on the explanation, e.g. that family has commitments in their original home location. (If the new CEO is worried for his own sake that these disclosures might tank the value of his shares, then I suspect there will be a lot of other ethical baggage he is shlepping with him into the new position.) The Board might claim that their decision is *intended* to be wealth-maximizing, but they could not demonstrate that it is wealth-maximizing in fact. Nor is this likely to be the best rhetorical approach for them to take if they want to minimize adverse shareholder reaction to their business judgment.
You may be right that no one cares much about the family flying back and forth. But especially as someone who takes an empirical approach to the study of law and economics, you might show more care before making a casual assertion of wealth maximization. That seems more like ideology than empiricism.
Dave! - January 1, 2008 at 9:11 pm
On one hand, I don’t have a problem with the practice, so long as it is disclosed… I think you are right that it may be a good recruiting tool for top executive talent.
That said… there are legitimate criticisms of the practice. Yes, if asked to pay for something like that out of pocket, the likely result would just be additional CEO compensation, but there are other leadership implications.
First, many other extremely valuable employees aren’t given a similar option. Many valued employees are expected to relocate–and given relocation assistance that doesn’t include private jet access. They have to weigh the impact of relocation on their families. Their families have to deal with relocation. They are often expected to make that sacrifice for their employer and/or career.
We should expect nothing less from corporate leadership. That’s what *leadership* is. If the family sacrifices are too great, that should be a strong indicator that they are not right for the position or that the position is not right for them.
jodi - January 3, 2008 at 3:01 pm
I don’t claim to know a whole lot about the “business” end of this whole plane thing with Ed Mueller (Qwest) but as a Qwest employee, I do have an opinion. I’m “just” a phone operator here in Minnesota, have been for 10 years, one of the most bottom rungs of the Qwest payscale. In our most recent contract, (right after Ed took over), we received ZERO raise for an upcoming 3 year period. ZERO, not one DIME! for 3 years, while his daughter uses the private jet! and I thought Joe (Naccio) was the only crook!
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