Governance and Compliance Considerations for Executive Officer Security Arrangements

Increasingly frequent threats directed toward corporate executives have led many companies to consider implementing or improving security arrangements for their executive officers. Companies thinking about new or modified security measures should take note of relevant corporate governance, disclosure, tax, and employee benefit considerations. This alert discusses these topics.

Corporate Governance Considerations

• As part of its duty of oversight, a board of directors should periodically consider the company’s needs with respect to executive security arrangements. This involves assessing: the potential risks to the safety and well-being of executive officers and other employees in light of the company’s location, business and industry; the public profile and roles played by executives; current social, economic and political events; and any significant threats to company personnel. In light of these risks, the board should assess whether it would be prudent for the company to implement new security measures or modify existing ones. Boards also should understand the policies and procedures that a company has adopted to monitor and respond to potential executive security threats, including escalation to law enforcement. In circumstances where there are material changes to a company’s risk profile or new threats to company personnel, boards should be prepared to revisit their prior analyses and consider changes as circumstances warrant.
• Boards may consider taking a broad view of executive security arrangements, going beyond company-funded vehicles or security staff to encompass measures such as policies regarding background checks on employees, contractors and business partners, heightened data protection and privacy procedures, including encryption of communications and restrictions on access to sensitive information, cybersecurity training for executives, or other procedures designed to address risks to the safety of the company’s personnel. Moreover, these security measures may need to extend to cover employees beyond the C-suite.

Disclosure Obligations

• When adopting security arrangements for executive officers, public companies should be aware of the disclosure requirements that may be triggered. Although it may be reasonable to conclude that all security arrangements are necessary for the performance of the executive’s functions at the company, in its 2006 release regarding executive compensation disclosures the Securities and Exchange Commission (the “SEC”) adopted a categorical position that any personal security expenses are disclosable perquisites rather than generally non-disclosable business expenses.[1] Under the perquisite disclosure framework adopted by the release, a security expense would constitute a perquisite if it (i) is not integrally and directly related to the performance of the executive’s duties and (ii) confers a direct or indirect benefit to the executive that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, if it is not generally available to all employees (to whom such item or expense may lawfully be provided) on a non-discriminatory basis (or is not actually and fully reimbursed by the executive to the company).
  • Applying this standard to specific facts necessarily involves a degree of judgment, but we think a company could reasonably conclude that the provision of security services at company facilities and while an executive travels to or from a business meeting does not need to be considered a perquisite. However, under the SEC’s position the same security services provided (even if at the recommendation of the company) to an executive to commute to the office, for other personal travel (e.g., for vacations or to attend outside board meetings), or for use by the executive’s family members, would be considered a perquisite. Additionally, the installation and monitoring of a home security system or the use of security staff to monitor an executive’s personal residence or to travel with the executive on a family vacation would be considered perquisites even if there is a compelling business reason for providing such services. Unless an executive reimburses the company for such security services, they will be considered perquisites.
• If the total value of perquisites and personal benefits provided to a named executive officer exceeds $10,000 within the applicable fiscal year, then all perquisites, including any security services, provided to the executive must be identified by type in a footnote to the “All Other Compensation” column of the summary compensation table. When categorizing the type of perquisite, companies should endeavor to be as specific as possible (i.e., categorization as “security transportation service” is preferable to “security” or “travel”) in order to provide investors with a clear understanding of the nature of the benefit.
• Whether a perquisite needs to be quantified by a dollar value in the footnote disclosure depends on its cost. If perquisites for a named executive officer are required to be disclosed, any perquisite that exceeds the greater of $25,000 or 10% of the total amount of perquisites and personal benefits provided to the executive during the fiscal year must be quantified in the applicable footnote, while perquisites that do not cross this threshold need not be quantified and may simply be identified and categorized.
• With respect to the quantification of perquisites:
  • A perquisite is valued at the aggregate incremental cost to the company. The SEC staff has not provided specific guidance with respect to calculation of aggregate incremental cost. Aggregate incremental cost is not necessarily equivalent to the amount attributable for federal income tax purposes (even if the latter is actually recorded as taxable income on an executive’s pay stub) or the fair market value of the perquisite. Thus, if security transportation services provided by a company to an executive for personal travel cost the company $100 and the fair market value of such transportation service is $200, the amount used to calculate the total of “All Other Compensation” as disclosed in the summary compensation table with respect to such executive would be $100 rather than $200.
  • The aggregate incremental cost to the company, and thus the value of a perquisite for SEC disclosure purposes, could be $0 (i.e., if an executive is provided security transportation services using a company vehicle and a company-salaried driver). However, even when there is no incremental cost associated with the provision of a perquisite, the perquisite still must be disclosed in a footnote and categorized by the type of expense (assuming the $10,000 threshold is met). For any perquisite that must be individually quantified, the company also must describe in such footnote the method used by the company to compute the aggregate incremental cost.
  • When calculating aggregate incremental cost, companies should consider all of the relevant factors that would go into the provision of a perquisite. For example, even if the provision of security transportation services are provided using a company car and a salaried driver, the driver may incur additional costs paid by the company when accompanying the executive (i.e., overtime pay, meals, gas, or other incidental expenses), those costs should be included in the aggregate incremental cost calculation.
• Companies that provide executive security services to their named executive officers should discuss such services, to the extent they are material, and the reason(s) for providing such services in the Compensation Discussion and Analysis section of their proxy statements (or corresponding narrative disclosures for smaller reporting companies). In light of recent events, we expect that proxy advisory firms and institutional investors will find transparent and well-reasoned disclosures regarding the provision of security services to be compelling. Companies that are considering adding or expanding such services in 2025 may also wish to consider previewing this development in the proxy statements for their 2025 annual meetings.

Tax and Employee Benefits Implications

• Like the SEC disclosure rules, the corporate income tax treatment of security benefits are focused on the cost of providing the benefits. In general, the cost of providing executive security is treated as an expense for the executive’s employer although its precise tax treatment may vary.
  • In many cases, executive security will be excluded from the executive’s income. As such, the cost of providing those benefits will not be subject to the deduction limitation under section 162(m) of the Internal Revenue Code (the “Code”), which limits an employer’s deduction for compensation paid to certain executive officers and highest-paid employees. In contrast, if the employer provides an executive with a home security system, the value of which it includes in the executive’s wages, the expense could be fully or partially disallowed under section 162(m) of the Code.
  • Section 274(l) disallows deductions for trips between an employee’s home and place of work. However, if secured commuting arrangements are necessary for the safety of an employee, the cost of providing those benefits is not subject to the deduction disallowance. Thus, the cost of providing secure transportation for an executive between home and office would not be subject to this disallowance. (A portion of the cost could be subject to section 162(m) to the extent income imputation is required, as discussed below.)
• Unlike SEC disclosure rules, the employment tax treatment of security benefits focuses on the value of the benefits provided rather than their incremental cost. In many cases, the employer can exclude the value of security benefits as a working condition fringe benefit under section 132(d) of the Code. This is particularly true for non-transportation-related security services, such as close personal protection and home security monitoring.
• The regulations governing working condition fringe benefits provide a special valuation rule that is a helpful tool for reducing or eliminating the need to impute income for transportation-related security benefits. To avail itself of the special valuation rule, an employer must provide an “overall security program,” which generally requires either security on a 24-hour basis or security consistent with the recommendations contained in a security study prepared by an independent security consultant.
  • The security study must be based on an objective assessment of the relevant facts and circumstances and determine that an overall 24/7 security program is not necessary. The study should identify specific security threats, such as a threat of death or kidnapping, or serious bodily harm, to the employee or similarly situated employees because of either the employee’s status as an employee of the employer or a recent history of violent activity in the geographic area where the transportation is to be provided (provided the activity is not focused on a particular group that does not include the employee or is limited to a location within the area to which the employee is not traveling). The study should be updated regularly to ensure that the security benefits being provided are appropriate.
  • If the employer provides security through an overall security program, the value of transportation-related security benefits is deemed to be zero. Critically, this does not eliminate the value of related benefits that the executive may receive as a result of the transportation provided. For example, if an executive, consistent with the security study, is transported to and from work in an armored vehicle by an armed driver trained in evasive driving, the value attributable to the special vehicle and trained driver is deemed to be zero, but the value to the executive of being provided with a personal commute must be included in the executive’s wages.
  • Similarly, if the executive is required to use private aircraft for personal travel for security reasons, the value of any such trip is not fully excludable, but may be determined using the 200% aircraft multiplier if using the Standard Industry Fare Level (“SIFL”) special valuation methodology for determining the value of the flights rather than the more common 300% or 400% multiplier for fixed-wing aircraft. This rule can also apply to certain members of the executive’s family.[2]
• If the executive reimburses the employer for the value of any taxable security benefits, the reimbursement reduces the amount required to be imputed into the executive’s wages. Because the tax rules focus on value, it is irrelevant whether the amount reimbursed is more or less than the cost of the benefit. Thus, the reimbursement of the value of personal flights determined using the SIFL methodology, for example, may be significantly less than the incremental cost. Accordingly, a reimbursement may eliminate the need to impute wages into the executive’s income, but not be sufficient to avoid disclosure of the perquisite. Note that Federal Aviation Administration rules regarding reimbursements related to private aircraft travel are complex and should not be undertaken without careful consideration and planning.
• Companies should also remember that they are not the only interested parties in these arrangements; executives themselves are likely to place even more emphasis on personal security than they have previously. Accordingly, companies must be mindful of personal security promises that they may have already made to executives in their employment agreements or offer letters and the promises that new hires to the C-suite are likely to demand during future employment negotiations. Making unilateral changes to security arrangements may not be permitted under an executive’s employment agreement—even if the change merely aligns the treatment for all executives for consistency or tax purposes.