Sempra CEO's pay in fine print
The firm's disclosures on compensation lack clarity despite new rules
to boost transparency.
By Kathy M. Kristof
Times Staff Writer
March 16, 2007
Sempra Energy Chief Executive Donald E. Felsinger got a hefty raise last
year, but investors may have a difficult time figuring that out by reading
the company's financial disclosures.
A proxy statement filed by San Diego-based Sempra, which owns Southern
California Gas Co. and San Diego Gas & Electric Co., is an example of the
corporate gobbledygook that caused Securities and Exchange Commission
Chairman Christopher Cox last week to scold some companies for "over-lawyering"
documents. Under new SEC rules, proxy statements are supposed to clearly
spell out how much executives earn.
"The idea was to disclose things in plain English," said Daniel Pedrotty,
director of the AFL-CIO's investment office. "This shows that some
companies are still trying to muddy the waters."
A careful examination of Sempra's proxy statement filed Tuesday would
reveal that fledgling CEO Felsinger received a nearly $10-million raise,
which gave him total pay of $12.2 million in 2006, the year he took the
jobs vacated by retiring Chairman and Chief Executive Stephen Baum. In
2005, Felsinger earned $2.85 million as president and chief operating
But there's more to those numbers than meets the eye.
Nearly $5.9 million of the 2006 pay is listed restricted stock awards,
gifts of shares that have strings attached. The terms of restricted stock
often require executives to remain employed for a set number of years
before he or she acquires full ownership of the shares. Sometimes
performance targets also must be met.
A footnote in Sempra's filing says that what's shown as Felsinger's 2006
restricted stock pay is all the money that's considered compensation
expense for that year. Consequently, the $5.9 million includes stock
awards that were made as early as 2003 but weren't fully vested, or owned,
To make matters more complex, the company said all the awards were
"discounted" to reflect the risk related to "market-based performance
measures." These discounts range from a fraction of 1% to nearly 32%. The
company explains in great detail how these discounts were derived.
However, it doesn't say how many shares were subject to which discount.
In other words, the real amount that Felsinger was awarded in restricted
shares could be $5.9 million to $7.77 million, depending on whether the
bulk of the award was discounted a little or a lot.
"We need an interpreter to translate this for us," Pedrotty said.
Joyce Rowland, Sempra's senior vice president of human resources, said the
company was not required to disclose which shares were subject to which
discounts, so it didn't.
"We gave the information that we believe is going to correspond to similar
information that other companies are going to give," Rowland said. "We are
required to comply with exactly what the SEC tells us to do. We are
required to report it in the fashion that is shown here."
An SEC official who didn't want to be named said that part of the reason
that Sempra's disclosures were obscure was because of the required
reporting method. Compensation arrangements may appear complex when
they're disclosed because they truly are complicated, the official
acknowledged. But why the company didn't include the relevant number of
shares with the detail about the discounts was inexplicable, he said.
Because government officials knew that shareholders might have trouble
understanding how share values were derived, they demanded that companies
produce a second chart to explain the stock awards made in just the last
Sempra did this, but shareholders will have to read through two pages of
small print to find out that the company lumped together restricted stock
awards and stock options, muddying the disclosure. (Stock options are
rights to buy shares at a set price in the future.)
It wasn't supposed to turn out this way.
In the wake of huge severance payments to several fired top executives,
including Chairman Richard Grasso of the New York Stock Exchange and CEO
Robert Nardelli of Home Depot Inc., Cox revamped shareholder disclosures
of executive pay to create "plain English" text and a "tally sheet" that
would total all forms of pay. Also, the rules demanded that companies say
what executives would get when they retired or were fired.
In his speech to the Corporate Counsel Institute last week, Cox complained
that filings the agency had received to date were already showing
"examples of over-lawyering" leading to long and incomprehensible
disclosures. He said he was looking for short and pithy prose — much like
the court decisions written by Oliver Wendell Holmes.
"If one of America's greatest jurists can cover great legal theories in
one page of clean prose with no jargon, why can't a proxy statement tell a
reader what she needs to know about the boss' pay in the same way?" he
In its proxy statement, Sempra made newly required disclosures that were
Sempra showed just how much its executives would get if the utility
holding company was acquired. If Felsinger was fired after a change of
control, he'd get $47.3 million — about $15 million more than he'd get if
he was fired "without cause" and without a change in control.
The pay of Sempra's directors also got the bright-light treatment. In
previous years, Sempra disclosed only that its directors earned a $40,000
annual retainer, plus fees of $1,000 to $3,000 per meeting. They also get
annual grants of stock options.
This year, the company was required to disclose just how lucrative those
meeting fees and option grants have become. The lowest-paid director among
those who were on the job all 12 months received $171,849.
As for plain-language skills, Rowland thinks her employer is doing fine.
She said she reviewed a dozen other proxy statements filed under the new
disclosure guidelines and believed Sempra's was among the most easily
Times staff writer Elizabeth Douglass contributed to this report.