San Diego Reader

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.

Part One

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.

Only executives of publicly traded companies, whose compensation is reported on the proxy statement, are included below. There are San Diegans who run private companies and make tens of millions every year -- for example, John Moores of the Padres or David Copley of the San Diego Union-Tribune. Their compensation is not covered by the Securities and Exchange Commission's rules.

I. AMN Healthcare Services

• Steve C. Francis
• Chairman
• Salary $189,000
• Stock & option awards $136,000
• Other comp $25,000
• Total $350,000
• Exercised options $52.1 million

Francis is the chairman of the board of AMN Healthcare Services, a health-care staffing company. A cofounder of the company in 1985, 53-year-old Francis was the CEO from 1990 to 2005. In 2005, he was a candidate for mayor of San Diego, losing in the primary election. He is considering a run for mayor again in 2008.

Throughout 2006, Francis cashed in his options, exercising them in batches of 50,000 and selling them the same day. The company notes that 2006 was the first year that Francis exercised stock options.

He was also awarded 5555 restricted stock units (RSUs) and 4445 stock appreciation rights (SARs); the fair value of these awards was $36,000. Francis owns 216,922 shares, which on September 21, 2007, were worth $4.1 million.

Susan R. Nowakowski

• CEO
• Salary $550,000
• Bonus $605,000
• Stock & option
• awards $1.3 million
• Other comp $29,000
• Total $2.5 million
• Exercised options $7 million

Nowakowski, 43, owns 300 shares, which on September 21 were worth $5652. She also owns 55,000 units of stock awards that have not vested, worth, according to the proxy, $1,514,700, as well as 289,405 exercisable options and 303,250 options that are not yet exercisable. Other compensation consists of "matching contributions to the Company's Executive Non-Qualified Excess Plan, the Company's 401(k) Plan and life insurance premiums." AMN Healthcare Services "generally does not provide its named executive officers with perquisites."

II. Qualcomm

Paul E. Jacobs

• CEO, director
• Salary $1 million
• Bonus $1.7 million
• Stock & option
• awards $24.9 million
• Other comp $141,000
• Total $27.7 million
• Exercised options $15.8 million

Paul Jacobs, 45, is the son of Qualcomm cofounder and chairman of the board Irwin M. Jacobs. Qualcomm makes wireless telecommunications products and services.

In 2006, Jacobs was granted 900,000 stock options at the grant price of $44.02. If the stock price grows 5 percent per year over ten years, according to the proxy statement, he will realize $24.9 million.

Jacobs owns 1,559,615 shares, some held in trusts, worth $63.7 million on September 21.

The son's stock is small potatoes compared to his father's stock wealth. Irwin Jacobs owns 26,904,101 shares, some held in trusts. The shares on September 21 were worth $1.1 billion. This year, dividend payments on those shares totaled $14.5 million.

Like most companies, Qualcomm has a voluntary deferred compensation plan: executives can defer 100 percent of their income "on a pretax basis." They stow their income in an account where it will go untaxed until they retire or choose to use it.

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