7C Office of the President TO THE MEMBERS OF THE COMMITTEE ON COMPENSATION: DISCUSSION AND ACTION ITEM For Meeting of January 17, 2007 DEFINITION OF TOTAL COMPENSATION FOR THE PURPOSE OF DEFINING THE “ANNUAL REPORT ON COMPENSATION” RECOMMENDATION A. The President recommends that the Committee on Compensation recommend to The Regents approval of the following definition of total compensation for the purpose of further defining the “Annual Report on Compensation”, as recommended by the Task Force on UC Compensation, Accountability, and Transparency, and adopted by the Regents under RE-74e. B. The President recommends that the Committee on Compensation recommend to The Regents approval of the definitions of the “Annual Report on Compensation”, including the group of University employees covered by the report, the time period, and other report parameters, as follows, as recommended by the Task Force on UC Compensation, Accountability, and Transparency, and adopted by the Regents under RE-74e. A. Definition of Total Compe nsation TOTAL COMPENSATION shall be defined as: 1. All salary and other cash payments made to the employee or on behalf of the employee including but not limited to: base salary, stipends, incentive payments, bonuses, cash awards, automobile allowances, or any other cash payments that would be considered W2 income to the employee. 2. One-time payments/reimbursements made to the employee or on behalf of the employee including but not limited to: relocation allowance, temporary housing reimbursements or allowances, moving expense reimbursements, payments pursuant to post-retirement agreement, payments pursuant to severance/separation agreements, or any other reimbursements made to the employee that would be considered W2 income and are not considered business-related expenses. 3. Any benefits and perquisites including but not limited to: health & welfare benefits including retirement available to all career employees, senior manager COMMITTEE ON COMPENSATION 7C January 17, 2006 -2- life insurance, executive business travel insurance, executive salary continuation for disability, any home mortgage loans, senior management supplemental benefit program contributions, University provided housing, vacation and sick leave accrual, leased automobiles, post-retirement employment agreements, special or supplemental health or retirement benefits, severance or separation agreement benefits, any cash payment in connection with any severance or separation agreement, special sabbatical or other leave arrangements, or any other benefits or perquisites provided to the employee for services rendered to the University of California. B. Definitions and Parameters for the Annual Report on Compe nsation 1. Population Cove red under the Annual Report on Compensation a. This report will include the “named positions” for which the Regents retain direct authority to approve compensation, as specified in item 7C which was approved by the Regents on July 20, 2006: president executive and senior vice presidents vice presidents associate and assistant vice presidents the university auditor the university controller principal officers of the Regents chancellors and vice chancellors national laboratory directors and deputy directors medical center CEOs deans Other positions, including the top five most highly compensated positions at each UC location, may be designated by the Regents for review and approval of compensation actions. The Annual Report on Compensation will also include positions for those employees who are in the Senior Leadership Compensation Group (SLCG) and all non- faculty academic administrators whose cash compensation exceeds the Indexed Compensation Level (ICL), currently at $200,000, as increased in accordance with RE-61. Compensation for the purpose of determining the ICL shall include all compensation included in item A1 plus relocation allowances from A2, above. This definition of compensation is consistent with and supports The Regents current practice for determining the ICL for reviewing and approving executive compensation. This is in accordance with the guidelines established in RE-61, approved on September 22, 2005 and under 7C approved on July 20, 2006. b. Employees in one of the named positions, but in an acting or interim capacity will be included in the report. Employees who serve in a named position during the COMMITTEE ON COMPENSATION 7C January 17, 2006 -3- reporting year, but step down from that role and are no longer active in that role on December 31 of the reporting year, will also be included in the report. Although not considered a part of total compensation, and therefore not included in the Annual Report on Compensation, data will be collected and tracked on the following: spousal employment agreements as a component of hiring, housing maintenance for those who are required to reside in University housing, administrative fund for business related expenses. This information will continue to be included in the individual action items presented to the Regents for approval. 2. Timeframe for Reporting under the Annual Report on Compensation This report will be produced and presented to the Regents for review and approval in March of each year (or the next scheduled Regents’ Meeting) and include the compensation details noted above for the preceding calendar year for the population described above. Since the 2006 Annual Report on Compensation will be the first report to transition to a calendar year basis from a fiscal year basis, we will generate another separate report for calendar year 2005, to cover the gap in reporting. This report will be presented to the Regents in May 2007. 3. Compensation Elements Displayed for the Annual Report on Compe nsation Data will be displayed for each person covered under this report, per the attached table as provided in Attachment 1 This definition of Total Compensation, and the layout and content of the Annual Report, is also consistent with the Budget Act language that requires the University to report annually to the Legislature on compensation for the “named positions” as defined above. The Budget Act language is included as Attachment 2. In addition, these reporting and definition recommendations are consistent with, and in some cases exceed, the reporting requirements established by SEC regulations adopted on July 26, 2006. Although these regulations are not applicable to the University of California, they represent sound disclosure standards. Attachment 3 provides related findings and recommendations from the Task Force on UC Compensation, Accountability and Transparency. Only the pertinent sections from this report are provided in this attachment. Attachment 3 Task Force on UC Compensation, Accountability, and Transparency The report from the Task Force on UC Compensation, Accountability, and Transparency recommends that The Regents clarify the definition of “total compensation” for Executives to include some missing elements of compensation and to ensure consistency with accepted standards and practices. The pertinent sections of the Task Force findings and recommendations are provided below. Please note that sections of the text that were unrelated to executive compensation reporting or definition of compensation were deleted for improved continuity and ease of reading. Disclosure and Transparency The Task Force finds that UC lacks a system to ensure reporting of tota l compensation for executives in accordance with policy. RECOMMENDATION The University should establish clear protocols, procedures, and forms that allow for full and timely compensation reporting. These reports should include: • Annual reports on base salaries for all UC employees. • Annual reports on total compensation for UC executives. • Annual reports on outside compensated professional activities. • Compliance with annual reporting requirements to the Regents and the Legislature. • Regular reviews of compensation policies and practices. • Regular reports on compensation actions taken by the Regents at Board meetings as well as compensation actions taken between Board meetings. The Task Force finds that the lack of consensus about what constitutes total compensation at the University of California exacerbates confusion about disclosure policies. The Regents should reaffirm the definition of “total compensation” in the Regents’ 1992 Principles for Review of Executive Compensation and further clarify some missing elements to ensure consistency with accepted standards and practices. Governance and Accountability The Task Force finds that the Regents’ ability to provide oversight of compensation decisions has been weakened by the large number of compensation decisions they were expected to review. The Task Force recommends that the Regents retain direct authority to approve compensation for the President, senior vice presidents, vice presidents, associate/assistant vice presidents, the university auditor, the university controller, principal officers of the Regents, chancellors and vice chancellors, national laboratory directors and deputy directors, medical center CEOs, professional school deans, and the top five most highly compensated positions at each UC location. This currently yields 264 individuals. The Task Force finds that UC lacks a system to ensure reporting of total compensation for executives in accordance with policy. This extends to policies requiring disclosure to the Regents when they are asked to approve initial senior- level appointments, to the media and the public once Regents’ compensation actions are taken, and in annual reports to the Regents and the Legislature. Annual reports: An example of the lack of checks and balances is the administration’s failure to submit required annual reports on executive compensation and compensated corporate board service for two years in a row. The reason given was that the staff person responsible for keeping track of reporting deadlines had retired. This is inexcusable. The University must fulfill its obligation to inform the Regents annually. In the future, such annual reports should be certified by the senior- most official responsible for the report’s content, and then posted online following receipt by the Regents. Furthermore, the annual report to the Regents on executive compensation should be revised to include all elements of total compensation, as required by the 1992 Regents’ Principles for Review of Executive Compensation. Annual online reporting of all base salaries: The Task Force believes the University should annually release base salaries for all UC employees, not just senior managers. In considering this matter, the Task Force weighed two issues: 1) whether to limit reports just to senior managers, and not to all employees; and 2) whether to extend reporting from base salary to total cash compensation. In the end, the Task Force believes that on the first issue, the public interest in disclosure extends to faculty, staff, athletic coaches, and others. Many public universities (the University of Michigan, University of Washington, and University of Illinois, to name a few) proactively release a comprehensive listing of base salaries for all employees. On the second issue, the Task Force is concerned that reporting more than base salary for all employees will put the University at a further competitive disadvantage in retaining top faculty. There have been reports that the recent media disclosure of UC total cash compensation has allowed competitors to make better and more informed offers to faculty. These same factors do not apply to senior administrators. Therefore, the Task Force believes that the University should report online total compensation for the 264 individuals whose compensation has been recommended for approval by the Regents (see Governance and Accountability Recommendation #6, p. 22). Uniform forms of disclosure. The Task Force spent a considerable amount of time on the issue of reporting and developed a sample compensation disclosure form to serve as a prototype for providing information for executive appointments and promotions (see Appendix, pp. 38-39). Such a form should be presented to the Regents along with other background material when they are asked to approve the hiring or promotion of an executive. A form like this should be used throughout the UC system, so that others who review and approve such appointments and promotions also receive the same information. Immediately following the Regents’ approval, the form could also be attached to the UC press release and posted on the Web, so that all elements of compensation are displayed in a clear, straightforward manner for the public and the media. Current practice in this area is inconsistent across the UC system. The UC Office of the President regularly reports base salary in its press releases on new appointments, whereas many campuses do not report even base salary. Consistency in disclosure across the UC system is paramount. Regular and interim Board of Regents actions. The University also needs to refine its protocols to ensure timely Web-posting of compensation actions taken by the Regents at their regular board meetings. With respect to actions taken between regular board meetings that can be approved by the President, the Chair of the Board of Regents, and the Chair of the Compensation Committee, the procedure is designed to provide flexibility in responding to urgent needs, including those involving recruitment and retention of key faculty and managers. These “interim board actions” are then reported to the full board at the next regularly scheduled meeting. However, the lack of clear protocols has caused some high-profile items to “fall between the cracks”—leading to an impression that items are being hidden from the public and the full board. The University needs to establish clear principles and procedures for determining what criteria need to be met (e.g., urgent retention cases that cannot wait for two months before the next board meeting) in order for a compensation package to be approved between regular board meetings. The University should establish clear protocols, procedures, and forms that allow for full and timely compensation reporting. These reports should include: • Annual reports on total compensation for UC executives. • Annual reports on outside compensated professional activities. • Compliance with annual reporting requirements to the Regents and the Legislature. • Regular reviews of compensation policies and practices. • Regular reports on compensation actions taken by the Regents at Board meetings as well as compensation actions taken between Board meetings.