A shift away from options - By Jack Davis, San Jose Mercury News

Article Launched: 06/06/2008 03:19:15 PM PDT

Recent trends in
executive pay in Silicon Valley - bigger bonuses, fewer stock options
and more stock awards - accelerated over the past year, according to
the Mercury News' annual What the Boss Makes survey of chief executive
pay.

That made for fewer breathtaking paydays among local CEOs, though many
continued to reap huge rewards for their labors. This year's top spot
belonged to Oracle founder Larry Ellison, whose pay totaled $61.2
million last year. That was 15 percent less than the $71.7 million pay
package given to the highest-paid local CEO the year before, Yahoo's
Terry Semel, a decline consistent with trend of the past few years:
"Median" CEO pay rose while "average" CEO pay fell.

What's the difference?

Suppose we had only three executives in our survey: our No. 1 CEO this
year, Larry Ellison; Steve Jobs of Apple, who was paid $1 last year;
and Jane Doe, a fictional CEO who was paid $1 million.

To figure out the average pay among them, we take their combined compensation ($62.2 million) and divide that by three to come up with $20.8 million.

To figure out the median pay,
however, we look for the paycheck in the middle, above and below which
are an equal number of executives. The median would be the $1 million
pay of fictional Doe.

The average pay among the 147 CEOs in this
year's survey was $4.1 million, down 5.5 percent from the year before
and 18 percent

lower
than the $5 million average salary in 2004. Median pay, however rose
last year to $2.3 million. That was 2 percent higher than the year
before and 18 percent higher than four years ago.

Could it be that
Silicon Valley's boards of directors and their compensation committees
are paying attention to critics of excessive CEO pay?

Even President Bush, never accused of being an enemy of business, has
urged boards to take action. "America's corporate boardrooms must step
up to their responsibilities," Bush said in a speech on Wall Street
last year. "You need to pay attention to the executive compensation
packages that you approve."

Some Yahoo shareholders took offense at the size of Semel's 2006 pay
package, which was made up almost entirely of an option grant of 6
million shares. Three top shareholder advisory firms urged stockholders
to vote against the re-election of the directors who sat on the
Internet giant's compensation committee last June. A week later Semel
was out as CEO, replaced by Yahoo co-founder Jerry Yang, who joined
Steve Jobs in taking $1 in pay last year.

New rules introduced by the Securities and Exchange Commission in late
2006 demand more public disclosures about executive pay plans. The
rules have forced committees to more carefully examine their
compensation plans, says Tim Sparks, president of Compensia, an
executive compensation advisory firm.

"When they have to describe them in painful detail, the committee
becomes immersed in those details and starts to question the design,"
Sparks said.

The top 10 pay packages for local bosses in this year's survey totaled
$191.3 million, down 16.1 percent from the $228.2 million awarded to
the 10 highest-paid CEOs in 2006. That year, compensation to those 10
bosses accounted for 37 percent of the total amount paid to all 144
CEOs in the survey. This year, the top 10 paychecks were 32 percent of
the total.

The formula for how Silicon Valley's executives are paid has changed dramatically in just a few years.

Stock options, which give the owner the right to buy shares of stock at
a certain price over a set number of years, made up 65 percent of CEO
pay three years ago. Last year, it contributed 41 percent.

The use of stock awards has more than doubled, making up nearly a
quarter of local CEO pay last year, compared with 10 percent in 2004.
Unlike stock options, the stock awards, which vest over time or when
certain conditions are met, retain value even if the stock price falls.

Cash payments from bonuses and incentive plans are also a bigger part
of CEO pay, rising from 13 percent of their compensation three years
ago to nearly 20 percent last year.

As for the least sexy compensation element of all - salary - it now
makes up 13 percent of pay, up from 10 percent in 2004. Almost all
executives in the survey got a bump up in salary last year, with the
"average" rising 2 percent to $534,117 and the median up 4 percent to
$475,000.