A Closer Look at Costs of the Corporate Jet

After SEC Warning, Some Firms Amend Accounting for Private Use of Planes by Top Brass

Some of America's largest and best-known corporations have been significantly underreporting the cost of letting their executives use company aircraft on personal trips, a pattern that has come to light through reports the companies have filed with the Securities and Exchange Commission, a recent enforcement case and a warning by a top SEC official.

In reports filed with the SEC this year, some companies have put a higher price on past years' flights and disclosed that they were changing the way they determined the value of the benefit.

A regulation that SEC spokesman John Nester said has been on the books for more than a decade requires that companies disclose the "incremental" cost of executive perks above a certain amount.

Using a formula devised for a different purpose -- figuring out how much executives owe in income tax on personal use of the corporate plane -- some companies in past years reported much smaller amounts or provided no indication that the company plane was being used for personal travel.

It is not uncommon for top executives to use company aircraft for vacations and the like. Some executives negotiate that privilege as part of their employment contracts. Some corporate boards, citing security concerns, even require executives to use the company plane for personal trips.

Regardless of the justification, "I don't think there's any question that [some companies] were low-balling those numbers" when they disclosed executive compensation in reports to shareholders, said Patrick McGurn, executive vice president of Institutional Shareholder Services, which analyzes corporate governance for big investors. "It's almost as though there was this large-scale decision made to kind of ignore the guidance that was out there and go with what had been . . . the accepted corporate practice of valuation."

Spokesmen for some companies that switched methods, asked about it in April, said there was nothing wrong with their past use of the tax formula.

David M. Stuart, a branch chief in the SEC's enforcement division, said in an interview, "There's no question that the proxy [pay disclosure] rule requires incremental cost." Using the income tax formula instead will often understate the cost to the company, Stuart said. In a recent enforcement action, the SEC accused Tyson Foods Inc. of improperly using the tax formula.

The choice of which formula to use can make a dramatic difference in the numbers that shareholders and the public see -- roughly akin to the difference between the price of a first-class airline ticket and the cost of operating a private plane.

Maytag Corp.'s original report on executive compensation in 2003, for example, made no mention of chairman and chief executive Ralph F. Hake's non-business use of corporate aircraft. However, a report Maytag filed with the Securities and Exchange Commission in March said that in 2003, his personal use of the plane cost Maytag $55,472."We do not believe by making this change our earlier disclosure was in any way incorrect," Maytag spokesman John Daggett said in a written statement.

Qwest Communications International Inc. originally reported that chairman and chief executive Richard C. Notebaert's personal use of corporate aircraft represented $116,839 of income to Notebaert in 2003. A more recent Qwest filing said it cost the company $377,232, more than three times as much.

"We believe we are in compliance, and we have been in compliance," said Qwest spokesman Steve Hammack.