Personal Use of Corporate Aircraft

Summary

Covers rules requiring disclosure of personal use of corporate aircraft by named executive officers and directors as perquisite

Per S-K 402(c), value of perquisites and other personal benefits must be disclosed in All Other Compensation column of Summary Compensation Table

Unless aggregate amount is less than $10,000

Each perquisite must be itemized in footnote disclosure

Value must also be disclosed if greater than $25,000 or 10% of total perquisites

Item 402(j) also requires disclosure of perquisites

In context of terminations / change-in-control

Value is incremental cost of benefit to company

Not cost attributed for Federal income tax purposes

e.g, SIFL rates not incremental cost for aircraft usage
This confirms prior SEC interpretive guidance

See proposal release 33-8655 2006

Provides sample of precedent disclosures and corporate policies on personal use of corporate aircraft

SEC Releases

SEC Rel 33-8732A §II.C.1.e.i 9.08.06

Business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job

SEC Rel 33-8655 2006

The cost of aircraft travel attributed to an executive for federal income tax purposes is not generally the incremental cost of such a perquisite or personal benefit for purposes of our disclosure rules

SEC FAQs

S-K Item 402 FAQs

General FAQ 4.07

These FAQs were issued 1.24.07
Supersede old S-K 402 FAQs in 1997 Telephone Manual
and its 1999 Supplement
See S-K 402 FAQs

Sample of SEC Disclosures Valuation Methodologies

Variable or Direct Operating Cost

Alcoa 2007

... based on the variable costs to the company, including fuel costs, mileage, trip-related maintenance, universal weather-monitoring costs, on-board catering, landing/ramp fees and other miscellaneous variable costs.
Fixed costs which do not change based on usage, such as pilot salaries, the lease cost of the company aircraft and the cost of maintenance not related to trips are excluded.

Altria 2007

The incremental cost of personal use of company aircraft includes the cost of trip-related crew hotels and meals, in-flight food and beverages, landing and ground handling fees, hourly maintenance contract costs, hangar or aircraft parking costs, fuel costs based on the average annual cost of fuel per hour flown, and other smaller variable costs.
Fixed costs that would be incurred in any event to operate company aircraft (e.g., aircraft purchase costs, depreciation, maintenance not related to personal trips, and flight crew salaries) are not included.

American Express language repeated in 2008 preliminary

... based on the variable cost to the Company of operating the aircraft and includes fuel costs, trip-related maintenance, the cost of trip-related crew hotels and meals, maintenance costs, landing and ground handling fees, in-flight catering and telephone usage and other variable costs.
The calculation does not include fixed costs that would have been incurred regardless of whether there was any personal use of the aircraft (e.g., aircraft purchase costs and depreciation, flight crew salaries and benefits, insurance costs, costs of maintenance not related to trips and service contracts).

CA, Inc. 2007

... based on the direct operating cost as calculated by a third party provider, based on a number of variables, including fuel, fuel additives, maintenance, labor, parts and landing and parking fees.

Coca-Cola 2008

Energizer 2007

We are, however, assessed a charge per flight hour to cover all variable operating costs associated with each flight, including fuel costs, mileage, trip-related maintenance, landing fees, trip-related hangar and parking costs, and on-board catering. The incremental cost to us for the directors personal use shown below reflects the assessed charge per flight hour for such use. Since the aircraft are used primarily for business travel, those amounts exclude any prorated portion of our fixed costs.

Exxon Mobil 2007

... based solely on direct operating costs (fuel, airport fees, incremental pilot costs, etc.) and does not include capital costs of the aircraft since the Company already incurs these capital costs for business purposes.

General Electric 2008

... includes the variable costs incurred as a result of personal flight activity: a portion of ongoing maintenance and repairs, aircraft fuel, satellite communications and any travel expenses for the flight crew.
It excludes non-variable costs, such as exterior paint, interior refurbishment and regularly scheduled inspections, which would have been incurred regardless of whether there was any personal use of aircraft.

J. C. Penney 2008

... by determining the incremental nautical miles flown, including any deadhead legs, and multiplying that number by the cost to the Company per nautical mile. A nautical mile is a unit of length used for maritime and aviation purposes. The cost per nautical mile is based on published industry data for each of the airplanes owned and operated by the Company.
Valuation methodology placed in CD&A rather than Summary Compensation Table, which is not standard

Liberty Media 2007

.. valued this incremental cost using a method that takes into account: landing and parking expenses; crew travel expenses; supplies and catering; aircraft fuel and oil expenses per hour of flight; any customs, foreign permit and similar fees; and passenger ground transportation.
Because the aircraft are used primarily for business travel, this methodology excludes fixed costs that do not change based on usage, such as salaries of pilots and crew, purchase or lease costs of aircraft and costs of maintenance and upkeep.

Macy's 2008

... represents a ratio of flight hours for personal flights divided by total flight hours on all company planes. The ratio was applied against total airplane cost (excluding depreciation, real estate taxes, insurance, rent and other fixed operating costs).
Disclosure includes significant detail on analysis of whether flights were deemed business or personal, and related calculation of personal costs
Notable for overall detail on executive perquisites

McDonald's 2007

... includes fuel costs, on-board catering, landing/handling fees and flight attendants, and excludes fixed costs which do not change based upon usage, such as pilot salaries and the cost of capital invested in corporate aircraft.

Texas Instruments 2008

... a method that takes into account: landing, parking and flight planning services expenses; crew travel expenses; supplies and catering expenses; aircraft fuel and oil expenses per hour of flight; communications costs; and any customs, foreign permit and similar fees.
Because company aircraft are primarily used for business travel, this methodology excludes the fixed costs, which do not change based on usage, such as pilots salaries and the lease cost of the company aircraft.

Time Warner 2007

... based on fuel, landing, repositioning and catering costs and crew travel expenses ...

Cost-per-flight-hour charge

AIG 2007

... calculated based on a cost-per- flight-hour charge developed by a nationally recognized and independent service. The cost-per-flight-hour charge reflects the direct operating cost of the aircraft, including fuel, additives and lubricants, airport fees and assessments, crew expenses and in-flight supplies and catering. In addition, the flight-hour charge also reflects an allocable allowance for maintenance and engine restoration.

Citigroup 2007

... calculated based on a cost-per-flight-hour charge developed by a nationally recognized and independent service. The flight-hour charge reflects the direct operating cost of the aircraft, including fuel, lubricants and the like, aircraft hangaring, insurance, airport fees and assessments, customs and permit fees, in-flight food and flight planning and weather services. In addition, the flight-hour charge also reflects an allocable allowance for the indirect costs of operating the aircraft including a reserve for periodic maintenance, a reserve for engine maintenance and a reserve for general maintenance.
At the request of Mr.Rubin, he entered into an Aircraft Time Sharing Agreement with Citiflight, Inc. (a subsidiary of Citigroup Inc.) on August10, 2006 that allows him to reimburse Citigroup for the cost of his personal use of corporate aircraft, and thereafter, Mr.Rubin has paid for such use.

Hewlett-Packard 2008

... uses data provided by an outside firm to calculate the hourly cost of operating each type of aircraft. These costs include the cost of fuel, maintenance, landing and parking fees, crew and catering and supplies.
For trips by NEOs that involve mixed personal and business usage, HP includes the incremental cost of such personal usage (i.e., the excess of the cost of the actual trip over the cost of a hypothetical trip without the personal usage).

JPMorgan Chase 2007

... operating cost per flight hour for the aircraft type used developed by an independent reference source, including fuel, fuel additives, lubricants; landing and parking fees; crew expenses; small supplies and catering; maintenance labor and parts; engine restoration costs; and a maintenance service plan.

Verizon 2007

... the total 2006 personal flight hours multiplied by the incremental aircraft cost per hour. The incremental aircraft cost per hour is derived by adding the annual aircraft maintenance costs, fuel costs, aircraft trip expenses and crew trip expenses, and then dividing by the annual flight hours.

Weighted average cost (variable)

eBay 2007

... based on a methodology that includes the weighted average cost of fuel, maintenance expenses, parts and supplies, landing fees, ground services, catering, and crew expenses associated with such use. Because the corporate aircraft is used primarily for business travel, the methodology excludes fixed costs that do not change based on usage. Fixed costs include pilot salaries, the purchase or lease costs of the aircraft, and the cost of maintenance not related to such personal travel.
Executives, their families, and invited guests occasionally fly on the corporate aircraft as additional passengers on business flights. In those cases, the aggregate incremental cost to eBay is a de minimis amount, and as a result, no amount is reflected in the table. Executives and their families also occasionally fly on the corporate aircraft as additional passengers on personal flights that are attributed to another executive, in which case the entire incremental cost is allocated to the executive who arranged for the personal flight.

EDS 2008

... based on the weighted average cost of fuel, on-board catering, aircraft maintenance, landing fees, trip-related hangar and parking costs, crew travel expenses and smaller variable costs. Since the corporate aircraft are used primarily for business travel, the methodology excludes fixed costs which do not change based on usage, such as pilots and other employees salaries, purchase costs of the aircraft and non-trip-related hangar expenses. Flight hours for personal aircraft usage reflected in the amounts reported above include hours for any related deadhead positioning of aircraft related to personal usage.
On certain occasions, an executives spouse or other guest may accompany the executive on a flight. No additional direct operating cost is incurred in such situations.

Not a perk?

Advance Auto Parts 2008

Employment Agreement with CEO, Darren R. Jackson
Executive not be required to change his place of residence in Minnesota in order to perform job duties
Executive has use of company plane to travel to and from corporate offices in Roanoke, VA
Such travel shall constitute business travel on behalf of the Company ... and shall not be deemed by the Company to be Personal Use travel

Sample of SEC Disclosures Spousal Travel

Sample of valuation methodologies reported in 2007 proxy season for spousal travel:

No additional cost

eBay 2007
EDS 2008
Energizer 2007
Wachovia 2008

Direct variable cost for additional passenger (e.g., catering costs)

Coca-Cola 2008

Average incremental operating costs

SunTrust Banks 2008

Closes with statement that valuation methodology may overstate actual incremental cost when aircraft would have flown on such trip for business purposes anyway

Reimbursement of commercial airfare

AIG 2007

Company reimbursed by directors for cost of commercial first-class airfare

CA, Inc. 2007

Although company believes there is no incremental cost for such travel, they assume charges comparable to first-class airfare

Goldman Sachs 2007

NEOs required to reimburse company for use by personal guests, in amount equal to greater of 1> aggregate incremental cost to company and 2> cost of commercial first-class airfare

Sample of Corporate Policies

Adobe 2008

In addition, we maintain a limited membership in a Marquis Jet Card Program. Adobe's policy related to the program allows participating executives (our Chief Executive Officer and for part of fiscal year 2007, our President and Chief Operating Officer) the use of a private plane for business travel; other executives and employees may accompany a participating executive for business purposes only. In addition, our policy allows family members to accompany a participating executive during business travel, if all related personal costs for the family members are paid for by the executive. This policy was adopted to allow for efficient travel by the participating executives, which we believe is consistent with the market standard, including allowing family to travel with the executive if all costs for the family members are paid by the executive. No family members have accompanied our executives on the aircraft to date.

Coca-Cola 2008

See also CD& disclosure on perquisites page 43
The Board requires Mr. Isdell and Mr. Kent to fly on the Company aircraft for business and personal use to provide security given the high visibility of the Company and its brands, to maximize their productive time, and to ensure their quick availability.

General Electric 2007 not included in 2008 CD&A

In June 2005, the MDCC adopted a policy with respect to personal use of company aircraft. The policy requires the vice chairmen to lease corporate aircraft from the company for any personal use in excess of $200,000 per year and to pay the expenses of such personal flights up to the maximum established under Federal Aviation Administration rules.

General Motors 2007

With the approval of the Chairman and CEO, the Corporations aircraft may be used by members of the Senior Leadership Group for business purposes. This provides for a more efficient use of their time given the greater possibility of direct flights and improved flight times than are available commercially. It also provides a more secure traveling environment where sensitive GM business issues may be discussed and enhances personal safety. A spouse may accompany the executive on the aircraft when the executive is traveling for business purposes and imputed income is assessed to the executive with taxes thereon reimbursed by the Corporation if the spouses participation is required for business purposes. The Executive Compensation Committee annually reviews all corporate aircraft usage by the Named Executive Officers. As part of a comprehensive security study, certain Named Executive Officers are encouraged to use the corporate aircraft for personal travel.

Hewlett-Packard 2008

Due to HP's global presence, HP maintains a certain number of corporate aircraft. Personal use of these aircraft by the CEO and his direct reports (members of the Executive Council, or "EC members") is permitted, subject to availability. The CEO may use company aircraft for personal purposes in his own discretion, and EC members may use company aircraft for personal purposes, if available and approved by the CEO. EC members are taxed on the value of this usage according to IRS rules. Under existing policy, the CEO receives tax reimbursement for the first 25 hours of personal usage, which usage may include guests.

Intel 2007

The company provides air and other travel for Intels executive officers for business purposes only. Intels company-owned aircraft hold approximately 40 passengers and are used in regularly scheduled shuttle routes between Intels major U.S. facility locations, and Intels use of noncommercial aircraft on a time-share or rental basis is limited to appropriate business-only travel.

J. C. Penney 2008

... the CEO is required to use Company aircraft for all business and personal travel. The Company provides a tax gross-up on income imputed to the CEO for personal use of Company aircraft.
The Company does not generally make Company aircraft available for non-Company business use by Company associates, other than to the CEO as required by the KAPP program. However, on extremely infrequent occasions, with the approval of the CEO, Company aircraft may be used personally by other Company associates such as in the event of a family emergency or to accelerate an executives return from a personal trip to address a business need. To the extent that a Company associate incurs taxable income in connection with the use of Company aircraft while addressing a business need, the Company provides a tax gross-up on the amount of imputed income.

Macy's 2008

Mr. Lundgren is permitted to use company-owned aircraft for personal flights as well as business flights. This benefit increases the level of safety and security for Mr. Lundgren and his family. In addition, making the aircraft available to Mr. Lundgren allows him to efficiently and securely conduct business during both business and personal flights. Furthermore, given the delays today associated with early check-in requirements, security clearances, baggage claim and the need for additional time to avoid missing a flight due to possible delays at any point in the process, commercial travel has become even more inefficient in recent years, and making the aircraft available to Mr. Lundgren maximizes his availability to conduct business both before and after his flights. Finally, Macys believes that the value to Mr. Lundgren of making the aircraft available for Mr. Lundgren and his family, in terms of convenience and saving of time, is greater than the incremental cost that Macys incurs to make the aircraft available and therefore is an efficient form of compensation for him.

McDonald's 2007

While the CEO is the only named executive officer who is permitted to use the Companys aircraft for personal travel, on certain occasions, at the discretion of the CEO, executives may be accompanied by their spouses when traveling to business events on the Companys aircraft. Named executive officers must reimburse McDonalds for a portion of the expense associated with Company-owned cars according to pre-established payment schedules, and the CEO is similarly required to reimburse to the Company the maximum reimbursement amount permitted under Federal Aviation Authority regulations applicable to the Companys operation of its aircraft. The Compensation Committee considers perquisites as reported in the tally sheets it reviews annually.

Commentary

Dewey Ballantine firm memo 2.05.07