Perquisites

What Are Perquisites?

Perquisites, often simply called "perks," are non-cash benefits or privileges extended to employees in addition to their regular salary or wages. These benefits, which fall under the broader category of Compensation & Benefits, are typically provided to senior executives or key employees and can range from company cars and private jet access to club memberships and housing allowances. Unlike direct salary, perquisites aim to enhance an employee's quality of life, provide convenience, or offer status. While some perquisites are purely for convenience, others might serve a business purpose while simultaneously offering a personal benefit. The value of these perquisites can significantly contribute to an individual's total compensation package, though their exact tax implications can vary.

History and Origin

The concept of perquisites has roots in historical practices where rulers and employers provided housing, food, and other amenities to their staff and loyal subjects. In the corporate world, the formalization and widespread use of perquisites gained prominence in the mid-to-late 20th century as a way to attract and retain top talent, especially at the executive level. During this period, companies began offering more than just competitive salaries, leveraging non-cash incentives to differentiate their employment packages. Over time, as corporate governance and transparency became increasingly scrutinized, particularly by shareholders, the disclosure of perquisites evolved. Regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), introduced rules to ensure public companies provide clear disclosure regarding the nature and value of executive compensation, including perquisites, in documents like the proxy statement. These regulations aimed to offer investors a clearer and more complete picture of the compensation earned by a company's highest-paid officers.⁸

Key Takeaways

• Perquisites are non-cash benefits or privileges offered to employees, typically senior staff, beyond their standard salary.
• They can include a wide range of benefits, such as company cars, private club memberships, housing, and personal use of company aircraft.
• The fair market value of most perquisites is generally considered taxable income to the employee by tax authorities like the IRS.
• Public companies are required to disclose executive perquisites, alongside other compensation components, in their financial reporting to promote transparency.
• While perquisites can enhance an employee's lifestyle and serve as retention tools, they often face scrutiny regarding their perceived value, cost to the company, and alignment with corporate performance.

Interpreting Perquisites

Interpreting perquisites involves understanding their value, tax treatment, and impact on a company's overall compensation strategy. For employees, perquisites represent a form of indirect compensation that can enhance their lifestyle or reduce personal expenses. However, the true value to the employee might be less than the cost to the employer, especially for benefits like personal use of corporate aircraft where marginal costs can still be substantial.

From an employer's perspective, perquisites are part of the broader compensation structure designed to attract, motivate, and retain key talent. Companies must consider the financial outlay, administrative burden, and potential optics associated with offering certain perks. For example, the personal use of a company-provided vehicle or private jet often results in "imputed income" to the employee, meaning the value of that personal use is added to their gross income for tax purposes. This valuation and subsequent taxation are critical aspects of interpreting perquisites, requiring careful calculation and reporting by the employer.

Hypothetical Example

Consider Jane, a newly appointed CEO of TechInnovate Inc. Her base salary is $1,000,000 per year, along with stock options as equity awards. As part of her employment agreement, TechInnovate also provides her with several perquisites:

1. Chauffeured Car Service: For all business and personal travel within the city, valued at $30,000 annually.
2. Private Club Membership: A membership to an exclusive country club, with annual dues of $15,000, which Jane uses for both business networking and personal recreation.
3. Financial Planning Services: Comprehensive financial planning and tax advisory services, costing the company $10,000 annually.

To calculate the value of these perquisites for tax and disclosure purposes, the company would assess the fair market value of each benefit. Assuming all these perquisites are considered taxable, TechInnovate would add the combined value of $55,000 ($30,000 + $15,000 + $10,000) to Jane's gross income. This amount would then be reported on her Form W-2 at year-end, subject to appropriate employment taxes and income tax withholding. Jane benefits from these services without directly paying for them, but she incurs a tax liability on their value as imputed income.

Practical Applications

Perquisites appear in various aspects of the financial and corporate world, primarily within executive compensation packages and corporate governance.

• Executive Compensation: Perquisites are a common component of executive compensation strategies designed to attract and retain high-level talent. They can include housing allowances, relocation assistance, personal security details, tax preparation services, and, notably, the personal use of corporate aircraft. The value and types of perquisites offered often reflect the company's industry, size, and its philosophy on executive rewards.
• Tax Compliance: Both companies and executives must navigate complex tax laws related to perquisites. The Internal Revenue Service (IRS) generally considers most perquisites as taxable income to the employee unless specifically excluded by law. Employers must correctly value these benefits and report them as part of an employee's taxable wages, often outlined in publications like IRS Publication 15-B.⁷
• SEC Disclosure: For publicly traded companies, the Securities and Exchange Commission (SEC) mandates detailed disclosure of executive perquisites. These disclosures are found in public filings such as annual proxy statements, providing investors with transparency into how executives are compensated beyond salary and bonuses. This allows shareholders to assess the alignment between executive pay and company performance.⁶ The SEC's rules require companies to disclose specific categories of perquisites if their aggregate value exceeds a certain threshold.⁵
• Employee Attraction and Retention: While often associated with executives, some forms of perquisites, or highly valued employee wellness programs and benefits, can be used more broadly to differentiate an employer in a competitive labor market. However, their primary application remains focused on top-tier talent.

Limitations and Criticisms

Despite their role in executive reward structures, perquisites face several limitations and criticisms, primarily centered on transparency, cost, and fairness.

One significant criticism is the lack of direct correlation between certain perquisites and company performance. Unlike performance-based bonuses or stock options, many perquisites are fixed benefits, leading to questions about whether they genuinely incentivize superior work or are simply gratuitous. The perceived disconnect can lead to dissatisfaction among rank-and-file employees and even shareholder activism.⁴

Another limitation involves the often-high cost of perquisites to the company relative to the perceived benefit to the executive. For instance, the personal use of corporate aircraft, while convenient for executives, can incur substantial costs for the company, including fuel, maintenance, crew salaries, and depreciation, which can far exceed the direct financial value to the individual.³ Such expenses can lead to public and regulatory scrutiny, particularly when companies are struggling or undergoing cost-cutting measures. This area has been a focus of increased audit efforts by the IRS.²

Furthermore, the valuation of perquisites for tax and disclosure purposes can be complex and sometimes contentious. Determining the precise fair market value of a non-cash benefit, especially when personal and business use are intertwined (e.g., a corporate apartment used occasionally for personal reasons), can be challenging. This complexity can sometimes lead to misclassification or under-reporting, inviting regulatory penalties. The AFL-CIO, for instance, publishes an "Executive Paywatch" report which often highlights the disparity between CEO pay, including perks, and average worker wages, fueling public debate on executive compensation practices.¹

Perquisites vs. Fringe Benefits

While often used interchangeably, "perquisites" and "fringe benefits" represent distinct but related concepts within the realm of employee compensation. The primary difference lies in their scope, typical recipients, and intent.

Perquisites are typically bespoke and exclusive, designed to cater to the specific needs and desires of a small, influential group within an organization. They often carry a significant monetary value and are seen as a reward for high-level contributions or a means to enhance the executive's work-life balance and convenience. In contrast, fringe benefits are standardized offerings available to a wider range of employees, often serving as a core component of a company's overall benefits package and generally aimed at improving employee welfare and overall job satisfaction. Both contribute to an employee's overall compensation, but perquisites are usually distinguishable by their selective nature and higher individual value.

FAQs

Are perquisites always taxable?

Most perquisites are considered taxable income to the employee by the Internal Revenue Service (IRS) and must be included in their gross income. The employer is responsible for determining the fair market value of the perk and reporting it on the employee's Form W-2. However, there are some exceptions and specific rules for certain types of benefits, so it's essential for employers to consult IRS guidelines, such as Publication 15-B.

Why do companies offer perquisites if they are taxable?

Companies offer perquisites as a strategic component of their executive compensation packages. Despite being taxable, perquisites can be highly effective in attracting and retaining top-tier talent by providing benefits that enhance an executive's lifestyle, convenience, or professional standing beyond what a cash salary alone might offer. They can also create a sense of loyalty and provide competitive differentiation in the talent market.

How do shareholders know about executive perquisites?

Public companies are required by the Securities and Exchange Commission (SEC) to disclose detailed information about executive compensation, including perquisites, in their annual proxy statement. This document is sent to shareholders before the annual meeting and filed with the SEC, making the information publicly available. The disclosures allow shareholders to review the compensation paid to the top executives and assess its alignment with company performance.

Can perquisites be performance-based?

While many perquisites are fixed benefits, some can be structured to be contingent on performance metrics. For example, access to a company vacation property might be granted only after achieving certain financial targets, or additional personal use of a corporate jet could be tied to meeting specific key performance indicators. However, this is less common than for other forms of compensation like bonuses or equity awards.

What is the difference between a perquisite and a bonus?

A perquisite is a non-cash benefit or privilege provided in addition to salary, designed to enhance lifestyle or provide convenience (e.g., a company car). A bonus is typically a direct cash payment awarded based on individual, team, or company performance, or as a discretionary reward. While both are forms of additional compensation, perquisites are non-cash and often ongoing, whereas bonuses are cash-based and usually one-time or annual payments.