San Diego CEOS ring up hefty pay gains, driven by stock compensation

Chief executives at San Diego’s publicly traded companies saw their pay packages balloon in 2021, propelled by gains in stock-based compensation as equity markets ran hot coming out of the pandemic.

The Union-Tribune collected CEO pay data from the proxy statements of 100 local publicly traded companies for their 2021 fiscal years. We ranked the top 50.

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The proxies showed total compensation for the entire group of local CEOs — including salary, cash bonuses, and perks — averaged $5 million. That’s up 35 percent over 2020.

At the region’s large public companies, stock compensation — either from vesting of restricted shares or the exercise of stock options — makes up the lion’s share of CEO paychecks.

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This equity pay typically has performance strings attached spanning three or four years. It’s tailored to ensure executives have skin in the game that aligns with shareholders.

It also gives CEOs — as well as high-skilled workers at many tech and biotech companies who also receive stock grants — a reason to stick around in a labor market that’s perceived to be in a talent war. If they’re picked off by a competitor, they abandon their cache of pledged shares and unexercised options.

Equity aside, cash pay for CEOs — salaries and bonuses — corresponds more closely to typical worker wages. It rose 11.6 percent on average to $1.3 million for public company chief executives last year.

Meanwhile, the average San Diego County wage earner took home just under $70,000, up 6 percent over 2020, according to the U.S. Bureau of Labor Statistics.

Public companies are required by securities regulators to disclose granular details regarding what they pay top executives. They also must hold advisory “say on pay” shareholder votes and in some cases calculate their CEO-to-median-worker pay ratio, among other things.

The gains racked up by San Diego CEOs last year mirror those for top bosses nationwide. The average compensation for chief executives in the S&P 500 increased nearly 20 percent to $18.3 million, according to the AFL-CIO.

Are they worth it?

CEO pay has long been a lightning rod in the debate over income inequality and what, if anything, politicians should do about it.

Supporters of more government action say public companies have been overpaying executives while underpaying workers dating back to the 1980s when labor union clout began to wane.

They see company directors as full of like-minded corporate captains who are onboard with high pay packages, and that CEOs get credit for things they have little to do with, such as low-interest rates or corporate tax cuts driving stock market gains that make everyone look like a top performer.

“In corporate America, the power has become too top-heavy,” said Sarah Anderson, program director at the Institute for Policy Studies, a progressive think tank. “The current system encourages top executives to fixate on the short term and bumping up the share price by any means necessary.”

The institute has called for presidential executive action to make it harder for corporations with wide CEO-to-worker pay gaps to win federal contracts. It also is encouraging higher taxes for companies with large disparities between the C-Suite compensation and rank-and-file pay. And it wants greater restrictions and taxes on companies that use excess cash to buy back their own shares.

“For every dollar that they spend artificially increasing the value of a share, it’s a dollar that is not going to things like raising worker pay, research and development, investing in new equipment for things like baby formula manufacturing and safety equipment for airlines,” said Anderson. “There is a role for responsible government action to encourage companies to have more rational pay practices.”

One of the proposals that Anderson championed recently become law. A 1 percent excise tax on share repurchases is part of the climate, tax and health care bill — the Inflation Reduction Act — that was signed by President Biden earlier this month. It’s forecast to generate $74 billion in taxes over 10 years.

Those wary of government intervention say past efforts to curtail executive pay have either backfired or been ineffective — while adding to the cost of being a publicly listed company.

One example is a 1993 tax code change that deemed compensation above $1 million as “unreasonable” and therefore no longer deductible. There was an exception, however, for performance-based pay — such as stock options.

That ushered in an era where stock replaced cash as the centerpiece of executive pay packages — sparking an explosion in CEO compensation during the 1990s that reset the bar for what executives earn.

Opponents of government action also contend companies are more complex today, often operating on a volatile global stage. And they’re worth more. Over the past two decades, the combined market value of S&P 500 firms has jumped from $7.5 trillion to $32 trillion, according to data from equity markets research firm YCharts.

Shareholders — the owners of public companies — have been mostly unconcerned with the amount CEOs make. Nearly 87 percent of firms on the S&P 500 and Russell 3000 indexes received overwhelming shareholder support for their say-on-pay ballot proposals this proxy season, according to Farient Advisors, an executive compensation and corporate governance consulting firm.

“Shareholders don’t care that much about the level of pay as long as their shares are doing fine,” said Kevin Murphy, an executive compensation researcher and chair of the finance and business economics department at USC’s Marshall School of Business. “And they start caring a lot when share prices go down, which means they might care more next year.”

Top of the Pack

Qualcomm CEO Steve Mollenkopf retired in June 2021 after eight years leading the company through a minefield of anti-trust litigation and a bruising hostile takeover fight. He stepped aside as the highest paid local CEO last year, earning $69 million.

Qualcomm won its legal and other battles over the years. Most of Mollenkopf’s compensation came from the vesting of $62 million in retention and performance shares. Last year, the smartphone technology provider’s revenue grew 55 percent to $33.6 billion.

J. Scott Wolchko of Fate Therapeutics; Cristiano Amon of Qualcomm; Kevin Gorman of Neurocrine Biosciences; and Oliver “Chip” Brewer III of Callaway Golf round out the top five.

For many mature companies, stock options have been out of favor as a compensation tool. But options remain a staple in pay packages for the biotech industry and among young technology firms — both of which are abundant in San Diego.

“If you think about it, if you want to have performance shares with goals that go out three years, that requires having a view into the future,” said Dayna Harris, a partner with Farient Advisors. “I would say mature companies have trouble doing that three years out. Imagine being a startup company. It is almost impossible. So you see things like stock options.”

Options are only valuable if the share price increases after they are granted. But they do have a 10-year lifespan, which can lead to big paydays when young companies grow up. Three of the top five highest-paid CEOs in San Diego last year s exercised stock options.

Neurocrine Chief Executive Kevin Gorman cashed in options granted a decade earlier at $8.65 per share — the company’s share price at the time. He sold them at roughly $110 each, which was the level Neurocrine’s share price reached last year. The $31 million realized gain accounted for the bulk of his compensation.

Cristiano Amon, Qualcomm’s president, was promoted to CEO last year. He ranked as the third highest paid local executive at $33.7 million, mostly from vesting of restricted stock. Since taking over, Amon has been diversifying Qualcomm beyond smartphone processors and into automotive, the Internet of Things and other industries. The company added 4,000 jobs in 2021, expanding its global headcount to 45,000. It increased research and development spending by 20 percent to $7.2 billion.

Oliver “Chip” Brewer III of Callaway Golf also exercised stock options last year to crack the top five list for the first time. His total pay reached $30.5 million. Callaway completed a major acquisition last year, buying trendy golf entertainment venue Topgolf International for $2.6 billion.

For the past couple of years, established companies have been required to disclose the ratio between what their CEO makes and the amount their global median worker earns. The ratio is based on granted CEO compensation, not realized equity pay .) Because the Union-Tribune uses realized pay as our metric, we don’t call out the ratio per se.

But we do report the pay of median workers — defined as half the workforce makes more and half makes less — when it is available for local companies.

The data remains fuzzy. Only 40 of the 100 local public companies reported median worker pay. The others weren’t required to because many smaller firms are exempt due to privacy concerns and other reasons.

But in general, the region’s larger life sciences and technology companies pay well — in part because they offer stock compensation not only to executives but also to their technical staff.

On average, the median worker at San Diego public companies made $164,406 last year, up 13 percent from 2020.

Mirati Therapeutics reported the highest median worker pay locally at $489,515. It didn’t provide a breakdown of the elements of its median pay package. The biotech company employs 413 full-time workers.

Arcturus Therapeutics, however, did provide a detailed account. Its median employee made $406,110 — including a salary of $126,322, bonus of $24,951 and stock options valued at $254,831. Arcturus employs 177 workers.

On the other end of the spectrum, PriceSmart, which operates 47 membership warehouse club stores in Central America and the Caribbean described its median employee as a full-time cashier at one of its Costa Rica outlets who makes $8,261. PriceSmart employs 10,400 workers.

Jack in the Box reported its median worker as a part-time restaurant employee working 29.5 hours per week who makes $19,128. The fast food chain employs 5,300 workers.

Critics of the CEO-to-median-worker pay ratio say it is a meaningless statistic to shareholders that was passed for political reasons. Some cities, such as San Francisco and Portland, have adopted measures that levy additional taxes on companies with high CEO-to-worker ratios operating in their jurisdictions. Similar programs have been promoted nationally.

The ratios “are industry specific, and business model specific with an industry,” said Harris. “Let’s say somebody outsources everything — manufacturing and other things — so everyone in the company who is not outsourced is making higher wages. They’re going to have a low pay ratio versus the company that is manufacturing stuff. So I don’t know how useful it is to investors. But they are tracking it.”

Say on pay

While shareholders often overwhelmingly support advisory say-on-pay proposals, there are signs that is changing. Nationally, high-profile firms including JP Morgan, Intel and Netflix all failed to garner majority approval for say on pay — when investors vote on top executives’ compensation — on this year’s proxy ballots.

Even for those firms that passed say on pay, the level of shareholder support has slipped somewhat from what it was a few years ago.

“The glow has fallen off of some of them,” said Harris. “Ninety percent is considered good. But the prevalence of that has declined in the last few years. It is noticeable to us. I think investors are paying closer attention than they have in the past.”

For local companies, Adamis Pharmaceuticals failed its say-on-pay vote for the second straight year. Mitek Systems got 55 percent approval, while Cardiff Oncology netted 52 percent.

Executives at Callaway Golf received special equity grants last year in connection with the Topgolf acquisition. The goal was retention of both the Callaway and Topgolf leadership teams. Brewer’s award has an estimated value of $23 million.

Institutional Shareholder Services, which advises big investment funds on proxy votes, criticized the amount of Brewer’s grant and said it lacked disclosed performance goals. ISS recommended shareholders oppose Callaway’s say-on-pay proposal. It passed anyway but with tepid 70 percent shareholder support.

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