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 officer.
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, until 2006.
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 year.
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 asked.
In its proxy statement, Sempra made newly required disclosures that were highly revealing.