NCPA - National Center for Policy Analysis

PERKS CAN BE PRODUCTIVE

November 19, 2004

Many business critics complain that executive compensation -- especially nonsalary perks -- are a way for executives to appropriate profits from the company. A new paper from the National Bureau of Economic Research argues that some perks make executives more productive and their companies more profitable.

The authors examined data on more than 300 publicly traded U.S. firms between 1986 and 1999, spanning a number of industries. They find that perks are pervasive:

  • CEOs have access to the corporate jet in 66 percent of the firm-years, receive chauffer services in 38 percent of total firm-years, and enjoy country club memberships in 47 percent of the firm-years.
  • Firms in the petroleum refining industry tend to offer the most perks, while computers and machinery companies offer the fewest.
  • Perks tend to be inertial -- older and more hierarchical firms tend to offer the most perks.

The authors argue that while some executive privileges are not economically justifiable, many other privileges do make economic sense. For example:

  • Timesaving perks should be offered to executives who manage larger business units and whose decisions affect more people on the margin.
  • Similarly, a company jet may be more efficient for firms located far from airports compared to those in close proximity to airline hubs.
  • CEOs who work in countries with longer median commute times may need a chauffer so they can avoid wasting time and work while they ride.

Overall, the researchers argue that executive perks increase executive productivity and should not be universally dismissed. Instead, perks should be an important aspect of business and organizational design.

Source: Carlos Lozada, "Are Perks Really Managerial Excess?" NBER Digest, November 2004; based upon: Raghuram Rajan and Julie Wulf, "Are Perks Purely Managerial Excess," National Bureau of Economic Research, Working Paper No. 10494, May 2004.

For text http://www.nber.org/digest/nov04/w10494.html

For abstract http://papers.nber.org/papers/w10507

 

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