San Diego is home to 35 rich executives, almost all white men, who receive millions in compensation for running our community's largest publicly traded companies. They have made some of their money from salary and bonuses, but the mountain of wealth each has accumulated is the result of stock and option awards. For years, income earned by executive officers has been reported by business news organizations. However, the value of stock and options awarded has been difficult for nonanalysts to determine. The identity and value of many perks have gone unreported.
Benefits such as health insurance and retirement savings are well known. But the perks suggest that executives may be financial wards of their companies. Some executives enjoy health benefits in retirement; payouts for voluntary or involuntary termination; use of the corporate jet (spouses usually fly free); use of the company car or chauffeured limousine; an interest-free loan to purchase a home; country or tennis or workout club memberships; personal health coaching; a home-security system; season tickets for sports teams or theater/music venues; legal fees; trust and estate-planning fees; bodyguards; expense allowances; and, for the very special, the crew and upkeep of a private yacht.
Born in 1934, in the wake of the 1929 stock market crash, the U.S. Securities and Exchange Commission was mandated by Congress to provide investors with reliable information about publicly traded companies. In 2006, the SEC adopted new rules requiring what they claim is "intelligible disclosure" of the compensation packages given to top officers.
A company reports executive pay as well as pension benefits and severance packages on the proxy statement, Schedule 14A. No easy read, the form is accompanied by a 372-page SEC-authored guide. Every company's proxy statement is posted on the Securities and Exchange website; they can run to 100 single-spaced pages, with patience-draining footnotes and tables.
To research what they should pay executives, companies hire outside consultants to compile data about competitive pay rates and to give opinions as to the reasonableness of awarding bonuses and options. The company's board then establishes the executive's contract. Since the marketplace for top managers (chief executive officers, chief financial officers, chief operating officers, presidents, and vice presidents) is highly competitive, contracts need to be sweet enough to attract the best people -- this, the mantra of every board. Word gets out, like a job advertisement: if you worked here, you, too, would be making this much.
Between 1994 and 2005, Mercer Human Resources Consulting reports, the median CEO salary has risen very slightly while total CEO pay has grown 6.5 percent per year. The chief factors driving this growth are stock options and other equity grants. The Corporate Library notes that the average CEO compensation of the S&P 500 companies in 2006 was $14.78 million.
According to an Internal Revenue Service rule, companies can deduct from their taxable income only $1 million of an executive's compensation. An exception is made for performance-based pay -- bonuses and equity awards made under a plan that satisfies a number of conditions, one of which is that pay must be based on pre-established goals.
The new SEC rules have spurred shareholders who are demanding that executives be held accountable for their pay. Many shareholders want companies to adopt a pay-for-performance plan: the more homers you hit for your ball club, the more you get paid; the fewer homers, the less you get paid. Investors are asking, is there any way to determine whether these executives are worth what their corporate boards are paying them?
One idea for making executives accountable is to allow shareholders a nonbinding advisory vote on executive pay plans. Another idea is to require compensation committees to simplify and to state their incentive programs clearly. Still another, favored by most shareholders, is to tie the executive's compensation to the growth of the company's stock. With the new rules, it is easier to compare an executive's pay with the stock growth. By this measure, many San Diego executives seem grossly overpaid while a few are making a (relative) pittance.
Executive compensation for San Diego's highest-paid executives
For each executive below, the salary, bonus, stock and option awards, change in pension value, and other compensation are provided. In most cases, the compensation is for fiscal year 2006. The category "other compensation" comprises the perks, whose identity and value, if worth more than $10,000, must be listed on the proxy statement. The value realized from options that were exercised in 2006 is also shown.
A stock option is the right to purchase a set number of shares in the future at a set price, called the grant price, usually the price of the stock the day the option was granted. Typically options must be held between three and ten years before they vest, when the person can exercise the options, i.e., purchase the shares. If the grant price is $10, and the stock price goes to $20, the executive makes $10 per share once he or she exercises the options and then sells the shares. The longer a person is with the company and the more the stock price grows, the more valuable the options become.
Executives are also compensated by the tax gross-up, a reimbursement of taxes paid on another perk, such as moving expenses. When the executive is reimbursed for expenses, the reimbursement must be reported as income on the executive's tax form, and this generates a tax liability. That tax is paid by the company. A spokesperson for a shareholder watchdog group called the tax gross-up the "Leona Helmsley provision . . . the ultimate in piggishness."
In 2006, Steve Francis of AMN Healthcare earned $350,000 in compensation and took home $52.1 million in profit after he sold shares in AMN. That year, three of San Diego's largest companies, in terms of market capitalization (the number of shares multiplied by the share's price), were Qualcomm, Sempra Energy, and Science Applications International Corporation (SAIC). According to Forbes, the CEOs of these three were among the top 500 highest-paid executives in America: Qualcomm's Paul E. Jacobs ranked 95; Sempra Energy's Donald E. Felsinger, 149; and SAIC's Kenneth C. Dahlberg, 305.