Correction: An earlier version of this article incorrectly stated that when there is a documented threat, the executive does not have to pay taxes on personal travel using the corporate aircraft. The travel is taxed, but at a reduced rate.
When he stepped down as the chief executive of Lockheed Martin in 2012, Robert Stevens received a base salary of $1.8 million, millions more in bonuses and incentives, use of the corporate aircraft and another expensive perk: personal security.
Lockheed spent $1.3 million to keep Stevens safe during his last year as CEO, then another $407,000 last year while Stevens, who was named during a 2011 terrorism trial as an al-Qaeda target, stayed on as a strategic adviser. The protection will continue, the company said in a recent regulatory filing, “based upon an assessment of the degree to which Mr. Stevens continues to be associated with the corporation and the assessed level of risk.”
Like many defense contractors and large corporations, Lockheed spends hundreds of thousands of dollars ensuring its top executives are safe. Companies pay for residential security, cars and drivers — and, in one case, housing a member of the board of directors “in a more secure residence.” Many also say that the executives must, for their own safety, fly on corporate aircraft, even for personal trips, a declaration that can create a tax benefit for the executives.
Security for VIPs has long been a mark of power, especially in Washington, where prestige is often measured by the length of motorcades and the number of suits with squiggly wires running into their ears. Foreign diplomats, government officials and Pentagon brass often travel in protective packs.
But in recent years, some top defense contractors have markedly increased the amount they spend on protection, citing threats passed on from government agencies and law enforcement. And as some perks have gone away under shareholder scrutiny, security has remained a benefit for many executives of large corporations — especially in the aftermath of the 9/11 attacks, analysts say.
“The entourage system is alive and well in D.C.,” said Arnold Punaro, a retired Marine Corps major general. “Obviously we need to be concerned about security, but when you see the caravan of three to four Suburbans going around town, you have to scratch your head and wonder if it’s too much.”
In 2010, Northrop Grumman received “specific information from federal law enforcement officials that led us to conclude that there were threats to the company and its principals,” the company has said in recent filings with the Securities and Exchange Commission. A spokesman declined to comment further.
Since the threat was received, the company has spent on average more than $1.5 million each year to protect Wes Bush, the chief executive, according to filings with the SEC. Between 2010 and 2012, Northrop also paid a total of $12.2 million in protection for Lewis Coleman, a non-executive chairman, part of which included “housing him in a more secure residence,” though the company was not specific about what that meant.
Lockheed provides “home security to our executives consistent with what is provided to corporate executives in public companies in our industry,” it said in a filing. “Security is also provided in accordance with our corporate policy to provide any employee who is the subject of a credible and specific threat on account of his or her employment at Lockheed Martin.”
A Lockheed spokesman declined to comment.
While perks such as country club memberships have gone away as shareholders increasingly criticized executive privileges during the economic downturn, personal security is one of the few that has remained constant among Fortune 100 companies, according to Equilar, a California firm that tracks executive compensation.
“Investors understand the value of keeping the CEO safe and don’t typically view security as an excessive perk,” said Aaron Boyd, Equilar’s director of governance research.
But it can be quite costly.
Some companies spend millions safeguarding their executives, according to regulatory filings. Las Vegas Sands spent $3.2 million on security for chief executive Sheldon Adelson, the high-profile conservative who has steered millions to GOP candidates, and his immediate family last year. Online retailer Amazon spent $1.6 million to protect Jeffrey P. Bezos, who also owns The Washington Post. And Oracle spent $1.5 million on protection for chief executive Larry Ellison’s California residence in 2013.
FedEx has what it calls a “Corporate Security Executive Protection Unit” that protects chief executive Frederick W. Smith. In its annual filing, the company says that his “personal safety and security are of the utmost importance to FedEx and its shareowners and, therefore, the costs associated with such security are appropriate and necessary business expenses.”
As a result of the threats, the cost of the security is considered business-related, said Michael Melbinger, the chair of the employee benefits and executive compensation practice at Winston & Strawn, a Chicago law firm. Normally, if executives and their families and friends use the corporate jet for personal use, they’d have to pay taxes on the value of the trip. But if the company cites a threat from an outside source, or if they hire a consultant who says there is a threat, the tax is applied at a lower rate, Melbinger said.
He said the practice is commonplace among “big brand-name companies where everyone knows who their executive is, and those in defense and international operations where they go to countries that are dodgy,” he said.
Steven Davidoff, a law professor at Ohio State University, called the practice a “loophole” that deprives the federal government of tax revenue and said it “should be closed.”
“Clearly it’s being exploited to allow executives to get perks,” he said. “If they want to give their executives those perks, fine, but they shouldn’t be subsidized by the federal government.”
Security officials say that even relatively unknown executives, worth millions, can be seen as a prime target, especially when traveling overseas. Defense contractors in particular say that given the nature of their business, which often compels them to travel to the Middle East and Asia, their leaders have been targeted.
In corporate America, security details are usually muted, designed not to draw attention. But just because the security often isn’t visible doesn’t mean it isn’t there, said Bruce Alexander, the president of All Source consulting, a Gaithersburg, Md., security firm.
Instead of using guards that are “hired by the pound,” he said, they use “a more discreet professional. The gray man. The guy who looks like a lawyer, that’s the image you want. You want to blend in.”
In addition to protecting their personnel, the companies’ headquarters have also gotten much more secure in recent years, said Loren Thompson, a consultant for many defense companies.
“There is just no way you’re going to get into the Northrop or Lockheed headquarters unless you have a raft of approvals — or a tank,” he said. “In some ways, the security is as extensive as any major government institution.”
The threats are real, he said, justifying the big expenses.
“They don’t just arm the world’s largest military power, they equip dozens of other countries and are the dominant force in the global arms race,” he said. “In the process, they make a lot of enemies.”
The threats listed in the SEC filings are usually not detailed, so it is difficult for investors to get a sense of their severity. In 2011, however, accused terrorist David Coleman Headley said during his trial that al-Qaeda was planning to kill Stevens, then Lockheed’s chief executive.
Not all the beneficiaries of corporate security are executives within the corporation. In 2011, Northrop Grumman spent $5.2 million on Coleman, who had been an outside member of its board of directors since 2001. The costs included the “more secure residence” as well as allowing him to use the corporate jet for personal travel, according to a filing.
The benefits for Coleman, whose main employment is as president of DreamWorks Animation, attracted scrutiny from shareholders and corporate governance watchdogs, who said it created a conflict of interest.
The perk “stood out because it was a large security expense for an independent director, a director that should be a representative of shareholders and not beholden to the company,” said Greg Ruel, a senior research analyst at GMI Ratings.
Not all defense contractors provide security, however. In its regulatory filings, SAIC says, “We generally do not provide perquisites and personnel benefits to our executives that are not otherwise available to other employees.”
Punaro, who served as an executive vice president at the company, said he never had security and didn’t fly in private planes.
“If there are perks there I never saw them, and I was high on the SAIC food chain,” he said. “We flew United or Delta.”