*Revised* Additions shown by underscoring; deletions shown by strikethrough ACTION ITEM

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1 *Revised* Additions shown by underscoring; deletions shown by strikethrough C6 Office of the President TO MEMBERS OF THE COMMITTEE O COMPESATIO: For Meeting of September 16, 2010 ACTIO ITEM DELEGATIO OF AUTHORIT TO PA CERTAI ICETIVE AWARDS DEFERRED B THE REGETS 2009 ACTIOS EXECUTIVE SUMMAR AD BACKGROUD The Regents approved the Proposal to Freeze Senior Management Group Salaries and Suspend Bonus and Certain Other Variable Pay s (item C1) at the Special Meeting of January 14, That item was subsequently amended by the Approval of Amendments to Freeze of Senior Management Group Salaries and Suspension of Bonus and Certain Other Variable Pay s, item C8 at the March 2009 meeting and by the Amendments to Freeze of Senior Management Group Salaries and Suspension of Bonus and Certain Other Variable Pay s, item C3 at the September 2009 meeting. Collectively, these items not only imposed a salary freeze on members of the Senior Management Group (SMG) for the and fiscal years but also imposed certain restrictions on SMG and non-smg participation in bonus, incentive, and variable pay programs for those years, as well as for the fiscal year. With regard to variable and incentive pay programs, the Regents deferred the payment of such awards for nonclinical incentive plans for the , , and fiscal years until the end of the fiscal year and indicated that this suspension would be reviewed at that time. With regard to bonus programs, the Regents (a) cancelled all pending bonus payments for the fiscal year for SMG members and non-smg members whose total potential cash compensation exceeded $205,000, the applicable Indexed Compensation Level (ICL) at that time, and (b) limited eligibility for bonus awards for the and fiscal years to those non-smg staff with annual base salaries of less than $100,000 and also capped such awards at $1,000 per year. Only employees who were SMG members during the fiscal year or who had total potential cash compensation for that fiscal year that exceeded $205,000, the applicable ICL at that time, were affected by the Regents actions with regard to fiscal year awards. In the fall of 2008, the Regents had deferred consideration of this group s awards for the fiscal year. As a result, those awards had not been approved at the time the Regents implemented the restrictions regarding bonus, incentive, and variable pay plans in 2009 and were directly affected by the restrictions. Because the fiscal year awards for all other employees did not require Regental approval, those awards had already been paid during 2008, consistent with the practice routinely followed prior to the Regents 2009 actions.

2 COMMITTEE O COMPESATIO -2- C6 September 16, 2010 Employees affected by the restrictions on bonus, incentive, and variable pay programs subsequently challenged the deferral or cancellation of their awards. As the Regents had provided that award payouts could be made if legal or contractual obligations were identified that required processing of a payout, a Special Complaint Resolution (SCR) Policy was developed to provide these employees with a complaint process through which they could demonstrate whether payout of their awards was required because of a legal or contractual obligation. The SCR Policy requires that an outside hearing officer conduct hearings and then issue factual findings and a recommendation for consideration by the Special Complaint Resolution Committee (SCR Committee). The SCR Committee then deliberates and decides whether to uphold, modify, or reverse the treatment of each complainant s award. Twenty-five complaints regarding fiscal year awards have been processed under the SCR Policy. The outside hearing officer, Richard L. Gilbert, a retired Sacramento Superior Court judge, recommended payment with regard to twenty-two of those complaints. The SCR Committee has determined that Judge Gilbert s recommendations should be followed and that interest at the Short Term Investment Pool (STIP) rate should be awarded in connection with those payments. Subsequent to the Regents deferral of incentive awards, the Regents adopted a new governance model for incentive compensation that brings greater rigor and independence to the process. The Regents also implemented a new SMG Awards Policy, effective July 1, The new governance principles mandate that an independent Administrative Oversight Committee (AOC) will be created for each incentive plan and will include subject matter experts and top management staff at the Office of the President. Any incentive plans that include SMG members will continue to require initial approval by the Regents, as well as Regental approval of any material or substantive changes to the plans. Otherwise, the independent AOCs will oversee administration of the plans, ensuring that they serve as effective tools for motivating excellent performance beyond employees regular duties and responsibilities and that plan administration is transparent and accountable. To that end, the applicable AOC will review and approve each plan participant s performance objectives at the outset of the performance period and, at the conclusion of the performance year, the AOC will review and approve award payouts. Any incentive award payment for an employee who reports directly to the Regents or who holds one of the executive offices identified in section 92032(b)(7)(B)(i) of the California Education Code will also require approval by the Regents. The incentive awards that were deferred by the Regents 2009 actions may not all have received the front-end rigor envisioned by the new governance model. However, the SCR process has provided back-end rigor that is comparable to what is required under the new model. The findings and recommendations that Judge Gilbert provided with regard to the awards he reviewed are relevant and instructive with regard to all of the incentive awards deferred by the Regents. Given the foregoing, it is recommended that the Regents (a) delegate authority to the SCR Committee to pay approve payment of the fiscal year awards that were the subject of complaints processed under the SCR Policy, taking into consideration the findings and recommendations of Judge Gilbert, and (b) delegate authority to the President, subject to the concurrence of the Chair of the Committee on Compensation, to review and pay any other

3 COMMITTEE O COMPESATIO -3- C6 September 16, 2010 awards for the , , and fiscal year that were affected by the Regents 2009 actions but were not the subject of SCR complaints, taking into consideration the principles set forth in the recommendations that Judge Gilbert rendered with regard to the complaints that were processed under the SCR Policy. Awards paid pursuant to this delegation for Senior Management Group employees and for employees whose total cash compensation exceeds $214,000 will be reported to the Committee on Compensation. RECOMMEDATIO The President recommends that the Committee on Compensation recommend to the Regents that: (1) The Regents delegate authority to the Special Complaint Resolution Committee to pay approve payment of the fiscal year awards that were the subject of 22 complaints processed in accordance with the Special Complaint Resolution Policy and determined to be deferred incentive awards, taking into consideration the findings and recommendations of by Judge Richard L. Gilbert, with such payments to include interest at the Short Term Investment Pool (STIP) rate. The 22 awards are displayed in Attachment 1. (2) The Regents authorize the President to review and determine, subject to the concurrence of the Chair of the Committee on Compensation, whether to pay any other awards for fiscal years , , and that were affected by the Regents 2009 actions, taking into consideration the principles set forth in the recommendations that Judge Gilbert rendered with regard to the awards mentioned in paragraph (1) above, to the extent applicable, with payments to include interest at the STIP rate where deemed appropriate. The governing principles set forth by Judge Gilbert are displayed in Attachment 2. Awards paid pursuant to this delegation for Senior Management Group employees and for employees whose total cash compensation exceeds $214,000 will be reported to the Committee on Compensation. (3) otwithstanding the foregoing, any award for an employee who reports directly to the Regents or who holds one of the executive offices identified in section 92032(b)(7)(B)(i) of the California Education Code will require approval by the Regents, in accordance with the Senior Management Group Awards Policy. BACKGROUD The SCR Policy was designed to provide complainants with extensive due process, including an evidentiary hearing at which they would have the opportunity to present documentary evidence and witness testimony in support of their claims and an opportunity to cross-examine the University s witnesses. The SCR Policy was made effective October 1, Employees who sought to challenge awards for the fiscal year had thirty days in which to file complaints under the SCR Policy. The SCR Policy provided that employees whose fiscal year awards had been deferred, rather than cancelled, could file complaints at that time or, alternatively, could wait until after the deferral period had ended.

4 COMMITTEE O COMPESATIO -4- C6 September 16, 2010 The SCR Policy requires that an outside hearing officer conduct the hearings and then issue factual findings and a recommendation. Those factual findings and recommendation, along with any responses submitted by the complainants or the University, would then be considered by the Special Complaint Resolution Committee, which consists of the Executive Vice President for Business Operations, the Provost and Executive Vice President for Academic Affairs, and the Senior Vice President for Health Sciences (or their designees). The SCR Committee deliberates and decides whether to uphold, modify, or reverse the treatment of each complainant s award. Twenty-six complaints were filed under the SCR Policy with regard to the fiscal year awards. One complaint was later withdrawn prior to hearing. The outside hearing officer, Judge Gilbert, conducted evidentiary hearings with regard to the remaining 25 complaints and subsequently issued factual findings and recommendations regarding each complaint. Judge Gilbert concluded that the University had properly distinguished incentive plans from bonus plans. The University had categorized plans as incentive plans if there was a plan document in effect at the beginning of the performance year, eligibility to participate in the plan was restricted to only certain employees, pre-established goals and objectives for each participant were required, pre-established weights and measures were used to determine the amount of each participant s potential payment when applied against the participant s goals and objectives, and the plan s payout varied based on the participant s actual achievements when matched against the pre-established weights and measures. The University categorized plans that lacked one or more of these elements as bonus plans. Judge Gilbert recommended that the University pay the deferred incentive awards, concluding that the University was legally obligated to pay these awards and that there was no legal basis for deferring them. He made this recommendation with regard to the awards of eighteen complainants. He also recommended that the University pay the awards of four other complainants whose awards had been categorized as bonuses and therefore cancelled. He concluded that, although the University had properly categorized the plan in which these four complainants participated as a bonus plan, the complainants had demonstrated that the plan had been administered, for them, like an incentive arrangement and, as a result, a legal obligation to pay their awards had been created. Finally, with regard to the remaining three complaints, which were filed by complainants whose awards had been categorized as bonuses and cancelled, Judge Gilbert concluded that the University did not have a legal obligation to pay these awards and recommended that their cancellation be sustained. After reviewing Judge Gilbert s recommendations, as well as the materials submitted by the complainants, the SCR Committee has determined that Judge Gilbert s recommendations should be followed. This would mean payment of twenty-two awards that total $480,860. The SCR Committee has also decided that interest at the STIP rate should be awarded to compensate the complainants for the delay in receiving these awards. The Regents 2009 actions stated that Regental approval would be required if any awards subject to the 2009 actions were to be paid as a result of legal or contractual obligations to any employees whose awards would have otherwise required Regental approval. As explained above, the only employees with fiscal year awards affected by The Regents 2009 actions were those for whom Regental approval was

5 COMMITTEE O COMPESATIO -5- C6 September 16, 2010 required. Accordingly, the awards for these twenty-two complainants would require Regental approval unless the delegation recommended by this Item is authorized. The findings and recommendations that Judge Gilbert provided with regard to the awards he reviewed are relevant and instructive with regard to all of the incentive awards deferred by The Regents 2009 actions. Those findings and recommendations were reviewed by the SCR committee, which is comprised of senior administrators at the Office of the President. Given the foregoing, it is recommended that the Regents delegate authority to the President, subject to the concurrence of the Chair of the Committee on Compensation, to review the awards for the , , and fiscal years that were affected by the 2009 actions but not the subject of SCR complaints and determine whether any of those awards should be paid, taking into consideration the principles set forth in the recommendations that Judge Gilbert rendered with regard to the fiscal year awards that were processed under the SCR Policy, with payments to include interest at the STIP rate where deemed appropriate. Without the delegation recommended by this Item, payment of awards for any SMG members would require Regental approval, as would payment of any awards for non-smg members for whom compensation matters would otherwise require Regental approval. Awards paid pursuant to this delegation for Senior Management Group employees and for employees whose total cash compensation exceeds $214,000 will be reported to the Committee on Compensation. By way of background, the deferred incentive awards that have not been the subject of complaints processed under the SCR Policy include (a) two fiscal year incentive awards that total approximately $51,000 and (b) and fiscal year incentive awards for approximately 1,700 employees that total approximately $4.5 million. Approximately half of these potential award recipients are represented staff. Awards paid to employees whose compensation is subject to reporting in the Annual Report on Compensation will also be reflected in the report for the fiscal year in which the payments are made. (Attachments)

6 Attachment 1 SUMMAR OF BOUS & ICETIVE PAMETS Location Last ame First ame UCLA DuWors Robert UCLA Elahi Farah UCLA Osman Ginger UCLA Rothman Judith UCSD Larsen Julianne Title Deputy Director -- Administration & Finance, Jonsson Comprehensive Cancer Center Chief Administrative Officer -- School of Medicine Chief Administrative Officer -- Pediatrics/Family Medicine, School of Medicine Associate Vice Chancellor -- Finance & Administration, Interim Associate Vice Chancellor for Development Annual Base Salary as of 06/30/08 Award % Award Amount (Based on 06/30/08) $ 189, % $ 18,907 $ 201, % $ 20,165 $ 231, % $ 15,000 $ 244, % $ 24,430 $ 174, % $ 28,090 Program ame Staff Achievement Award Staff Achievement Award Staff Achievement Award Staff Achievement Award Development Officer Variable Pay SMG (/) UCOP Decision Bonus Bonus Bonus Bonus Judge Gilbert Recommendation Operated Like Operated Like Operated Like Operated Like UCSF Canning Marcia Chief Campus Counsel & Associate General Counsel $ 217, % $ 7,566 UCSF Fellouris Mara Executive Director -- Program Management Office $ 202, % $ 6,956 UCSF Hsu Stella Associate Vice Chancellor -- Campus Life Services $ 188, % $ 13,398 UCSF Lopez Randy Acting Vice Chancellor -- Finance & Administration $ 277, % $ 20,743 UCSF Showstack Jonathan Assistant Vice Chancellor/CIO -- Office of Academic & Administrative Information Services (OAAIS) $ 247, % $ 16,532 UCSF Tyburski Lawrence Director -- Human Resources $ 198, % $ 9,201 UCSF Vermillion Eric Associate Vice Chancellor -- Finance $ 277, % $ 23,828

7 SUMMAR OF BOUS & ICETIVE PAMETS Attachment 1 Location Last ame First ame Title Annual Base Salary as of 06/30/08 Award % Award Amount (Based on 06/30/08) Program ame SMG (/) UCOP Decision Judge Gilbert Recommendation UCSF Wissmiller Andrew Chief Operating Officer -- ITS, Office of Academic & Administrative Information Services (OAAIS) $ 198, % $ 7,076 UCSF Wong Jane UCSF Autry Susan UCSF Caffey Marie UCSF Chrisman Maye UCSF Hindery Michael UCSF Martin Margaret UCSF Rein David UCSF Skinner Clifford UCSF Barclay Steven Acting COO -- Office of Academic & Administrative Information Services (OAAIS) Executive Director -- Clinical Translational Science Institute Director -- Psychiatry & LPPI Administration Acting Director of Administration -- Department of Medicine & Director of Finance, Department of Medicine Vice Dean -- Administration, Finance, & Clinical Affairs Executive Director -- Strategic ning & Managed Care Acting Vice Dean -- Administration, Finance, & Clinical Affairs, and Director -- Finance & Operations Director -- Medical Group Business Services Senior Vice Chancellor -- Finance & Administration $ 199, % $ 8,125 $ 218, % $ 34,539 $ 199, % $ 17,148 $ 195, % $ 29,280 $ 335, % $ 20,783 $ 180, % $ 27,000 $ 179, % $ 28,345 $ 179, % $ 38,804 $ 360, % $ 64,944 Award Amount Total: $ 480,860 Management Management Management Management Management Management Management Staff Recognition & Development Program Total Amount of Awards Judge Gilbert Recommends to be Paid: $ 480,860

8 Attachment 2 By its terms, Paragraph 5 distinguished between payments under"incentive plans', which II were''deferred;' and those under"bonus"plans, which were canceled. Consonant with these Regental determinations, the Office ofthe Vice President for Human Resources ('OP', hereafter) developed criteria to distinguish bonus plans from incentive plans and to distinguish"c1inicai' plans, which, for were not affected (Paragraph 4 plans) from non-clinical plans, which were (Paragraph 5 plans).7 s which had a plan document in effect at the beginning ofthe year, restricted eligibility to only certain employees, had pre-established weights and measures to determine the amount ofthe potential payments when applied against goals and objectives, required pre-established goals and objectives for each participant and which had a variable plan payout based on the achievements ofthe employee when matched against the'\veights and measures'were categorized as"incentivfl'plans. Extra compensation plans which wcre missing one or more ofthese elements were classified as'bonus'plans for application ofthe Paragraph 5 criteria. 'Oinical" plans are those plans which showed an alignment of goals with the Clinical Enterprise specifically in the areas offinancial Perfomlance, Quality Improvements, Patient Satisfaction, Achievement Toward Strategic (ofthe Enterprise) and People and Other Resource Management and which plans are funded from clinical revenue. s not meeting these criteria were considered non-clinical and subject to Paragraph 5. To apply these criteria in the administration of The Regents March action, OP requested the campuses to supply plan documents. The criteria to distinguish bonus versus incentive and clinical versus nonclinical plans were applied by OP at the "plan level", meaning that individual payments were not reviewed with respect to the application of the bonus versus incentive or clinical versus non-clinical criteria. III 7 o formal "policy" or memorandum of these criteria was created or circulated. A document noting the criteria discussed here was created and is UC Exhibit H. Hearing Officer recommendations Regarding Regental Bonus and Actions - 3

9 Attachment 2 may unilaterally terminate an employment security policy that has become an implied-in-fact unilateral contract. (See, e.g., Foley, supra, 47 CaL3d at pp ) Under contract theory, an employer may terminate a unilateral contract of indefinite duration, as long as its action occurs after a reasonable time, and is subject to prescribed or implied limitations, including reasonable notice and preservation of vested benefits. (1 Witkin, Summary ofcal. Law, supra, Contracts, , pp LJ'(Asmus v. Pacific Bell (2000) 23 Ca1.4th 1,9,999 P.2d 71, 96 CaLRptr.2d 179). Consideration of this rule raise the question of whether, under the general or individual circumstances, The Regents were free to modify or cancel the payments after the fact. IV. Recommendations. A. s. 1. It is recommended that the Complaint Resolution Committee find that OP properly characterized the plans identified as " s' in accordance with The Regents' March 19 action. As noted above, there was no information presented as would lead to the conclusion that the OP used improper or arbitrary criteria in categorizing award programs as either bonus or incentive in nature. 2. It is recommended that all"deferred'payments under plans categorized as''incentive plans'be immediately paid. The criteria for distinguishing incentive from bonus plans properly recognizes the legally cognizable distinction between a specific, advance offer of a measurable payment based on objectively determined performance criteria and an after the fact subjectively determined award. Where such a specific"offef' is made, a specific, reasonable expectation of payment on performance is created and a legally binding obligatio ofpayment arises on performance by the employee. The only question is whether the general policy requiring Regental approval in connection with employees, otherwise entitled to the payment, whose compensation is above the ICL, can be asserted as a valid condition to payment which may be "deferred', Hearing Officer recommendations Regarding Regental Bonus and Incentivc Actions - 14