A Blog by Jonathan Low


Jun 14, 2021

As CEO-Worker Pay Gap Widens, Are Tech's Highest Paid Leaders Worth It?

Executive 'pay for performance' was supposed to tie leadership compensation to a company's actual results and erase questions about whether leaders' were fairly treated financially. 

But performance was tied primarily to stock price performance, rarely to any operational metrics or to measures based on concepts like 'replacement value,' - eg, to what degree a leader's personal contributions could really be attributed to the enterprise's outcomes versus that of a predecessor or competitor. And the relationship between pay and stock price performance was called into question as leaders were voted protections whenever stock prices - and their options - went down 'due to circumstances beyond their control.' This has become especially concerning in big tech where leaders pay has continued to grow exponentially by comparison with their employees. The strategic question is whether this sort of no-fault executive pay will blind enterprises to competitive threats or opportunities and ultimately lead to sub-optimal outcomes. JL

Shira Ovide and Peter Eavis report in the New York Times:

In the technology industry, the cumulative paychecks of a half dozen executives topped $13.2 billion in the past 15 years. How do we know if they’re worth the money? C.E.O.s received 274 times the pay of the median employee at their companies, compared with 245 the previous year. C.E.O. pay jumped 14.1% last year compared with 2019, while workers got a 1.9% raise. (And) hurdles may be too easy. Apple CEO Tim Cook's stock awards are now worth $3.5 billion, or nearly 10 times that “historic” number a decade ago. (But) it’s hard to assess how much of Apple’s financial or stock performance is Cook’s doing.

Apple paid its chief executive, Tim Cook, $1.4 billion in total since 2007. Oracle’s chairman, Larry Ellison, racked up stock and cash valued at nearly $1.9 billion over the same period. And Mark Zuckerberg has pulled in $5.7 billion from Facebook since the company went public in 2012.

These are among the billion-dollar men of the technology industry. The cumulative paychecks of a half dozen executives topped $13.2 billion, according to a new analysis of the past 15 years. Those are years in which tech companies became powerful forces in the economy, our lives and world affairs. The mood about technology has soured more recently, but the tech bosses’ paychecks mostly remained unscathed.

The New York Times published on Friday an analysis of the most highly paid chief executives of America’s publicly traded companies in 2020. During the pandemic, the executives received some of the richest pay packages ever, my colleague Peter Eavis reported.

To get a picture of what companies paid their bosses over a longer period of time, the executive compensation consulting firm Equilar ranked the 10 executives with the most cumulative total pay, going as far back as 2006 when there was a change in corporate compensation disclosures. Tech bosses took six of those 10 spots, largely because of the value of stock that their companies gave them.

The billion-dollar-plus paychecks of a handful of men — and yes, they’re all men — bring up a big and unanswerable question: How do we know if they’re worth the money?

Baseball stat geeks know about a measure called wins above replacement, which tries to quantify the value of a player by estimating how many more or fewer wins a team has with him compared with a replacement who might be cheaper. Even in the tech industry, which obsesses over data, there is little attempt to apply a wins above replacement stat for the corner office.

Maybe a hypothetical replacement leader of Alphabet would do a better job than Sundar Pichai, and for less than the $1.1 billion in stock and other compensation that Google’s parent company has paid him since 2015, according to the Equilar analysis. Boards of directors don’t typically try to find out. Chief executives are paid what they’re paid.

Let me dig deeper into a couple of the C.E.O. pay figures. Calculating what corporate chiefs are “paid” is a complicated and contentious exercise. In some cases, the tech bosses’ compensation is even larger than the mind-boggling numbers initially suggested.

When Cook took over for Steve Jobs in 2011 as Apple’s chief executive, the company pledged to give him as many as 28 million shares, after adjusting for stock splits, over the next decade. Back then, Cook topped The Times’s annual ranking of highest paid C.E.O.s, based largely on the potential $376 million value of that stock. One expert called Cook’s stock award “historic to such a degree that it skews the numbers.”

But Cook would take home all the shares only if he stuck around for 10 years and if the company’s stock price rose faster than that of most other large companies. So what will happen? Cook is likely to collect all or nearly all of the shares, with a final batch due in August. Those shares, by one calculation, are now worth $3.5 billion, or nearly 10 times that “historic” number a decade ago.

Companies typically justify top-dollar executive paychecks by saying that the bosses are irreplaceable and that they only get rich when shareholders do, because they are paid largely in stock. Cook’s wallet has gotten fatter since 2011 from Apple’s climbing stock price, right alongside anyone who happened to buy Apple stock.

But again, it’s hard to assess how much of Apple’s financial or stock performance is Cook’s doing. Maybe you would do 80 percent as well as Cook at a fraction of the cost.

Apple doesn’t disclose the $3.5 billion figure directly. I tallied it from Apple’s annual statements to shareholders. Equilar calculated that Cook’s cumulative compensation since 2007, when he was Apple’s chief operating officer, is $1.4 billion. Equilar’s figure assessed the value of Cook’s stock in each year that it was released to him, not the current value of those shares. Like I said, there are many ways to slice and dice C.E.O. pay.

The figures might seem light years (or a handful of zeros) away from most people’s financial situations, but they also have a heartening message for anyone who feels clueless about money.

Zuckerberg topped the Equilar ranking of longer-term C.E.O. pay, almost entirely from stock options on 120 million shares that Facebook handed him shortly after the company was founded. Zuckerberg sold about one-third of those shares for $2.3 billion more than a year after Facebook went public. If he’d held onto those shares instead, they’d be worth nearly $14 billion now.

But don’t lose sleep worrying about Zuckerberg’s poorly timed stock sale. He’s still worth $124 billion.

Even in a gilded age for executive pay, 2020 was a blowout year.

A comprehensive survey of the 200 highest-paid chief executives at public companies conducted for The New York Times by Equilar, an executive compensation consulting firm, revealed some of the biggest pay packages on record, and showed that the gap between C.E.O.s and everybody else widened during the pandemic.

Alexander Karp, the chief executive of Palantir, a data mining company that gets over half its revenue from government contracts, was the highest paid C.E.O. at a publicly traded company, with compensation worth $1.1 billion.

Based on hundreds of company filings, the survey found that only 13 female C.E.O.s made the top 200 list. Dr. Lisa Su, chief executive of Advanced Micro Devices, a computer chip maker, was the highest paid woman, with compensation of $40 million, but ranked only 40th overall.

DoorDash, the food delivery company that relies on gig workers, and whose business ballooned as diners ordered in during the pandemic, awarded Tony Xu, its C.E.O., compensation worth $414 million. That put him in second place in the survey.

In third, with compensation valued at $370 million, was Eric Wu of Opendoor, a digital platform for buying and selling homes that, like DoorDash, became a public company only last year.

Six of the biggest earners made it onto Equilar’s ranking of people with the 10 largest pay packages of the last decade, topped by Elon Musk of Tesla, who was awarded $2.3 billion in 2018.

The class of 2020 crashed another elite club: Eight of the top-earning executives got compensation last year worth more than $100 million. In 2019, only one earned more than that; in 2018, five did.

The gap between the C-suite and the rest grew bigger, too. C.E.O.s in the survey received 274 times the pay of the median employee at their companies, compared with 245 times in the previous year. And C.E.O. pay jumped 14.1 percent last year compared with 2019, while median workers got only a 1.9 percent raise.

“While Americans were cheering on the workers who were keeping our economy going, corporate boards were busy coming up with ways to justify pumping up C.E.O. pay,” said Sarah Anderson, global economy director at the Institute for Policy Studies, a progressive think tank.

Last year’s colossal awards sprouted from a well-developed corporate compensation culture, in which boards, consultants and executives preach the gospel of “pay for performance,” which typically links C.E.O. compensation to the company’s stock price. But this approach can lead to enormous payouts if stocks go up. The S&P 500 returned nearly 18 percent in 2020, including dividends, and C.E.O.s reaped handsome rewards. But the question is, how much do they really deserve?

“They are emphasizing performance equity awards so much and ignoring how big they are,” said Michael Varner, director of executive compensation research at CtW Investment Group. “This is one of the chief culprits of the continuing rise in executive pay over the decades.”

Palantir, DoorDash and Opendoor only began trading on the stock market last year. All three reported big net losses and their stocks are trading below recent highs. Yet the boards of all three companies granted the C.E.O.s. tremendous compensation packages.

When boards grant big packages like these, most of the pay comes from stock awards, which are often built so the executive reaps gains only if certain objectives — like stock price targets and revenue numbers — are met. But if the bar is set low enough, chief executives may soon sit on outsize gains.

The conditions set by Palantir’s board for Mr. Karp’s 2020 long-term equity award have put him in a very good position. The options and stock have an estimated market value of $2.8 billion, most coming from options, which are in the black when Palantir stock exceeds $11.38. With the stock now at $24.67, the options show a $1.9 billion market gain. There are no price hurdles for restricted stock in the package, most of which, like the options, he receives over the next 10 years.

In its proxy statement, Palantir, which declined to comment, said senior executive compensation was “designed to attract, retain, and motivate our leadership team in a highly competitive technology talent market while simultaneously aligning executive interests with those of our stockholders.”

The compensation figures in the Equilar survey amount to a snapshot in time, using particular accounting rules, based on a vast array of corporate financial filings through April 30. But the ultimate value of the executive pay packages may end up being far higher than the numbers cited by individual companies, especially if their stock prices rise.

In November, the board of IAC/InterActiveCorp, an internet and e-commerce company, granted Joseph Levin, its chief executive, a long-term stock award valued at $184 million, making him the fifth highest-paid executive last year.

The reward is dependent on stock price targets. IAC’s price has already risen enough for him to qualify for two-thirds of the stock. Asked whether the hurdles had been set too low, the company noted the award’s 10-year vesting period: “Mr. Levin has not yet vested into any shares. These prices need to be sustained or improved for 10 years for Mr. Levin to achieve the full award,” it said.

DoorDash’s board appears to have given Mr. Xu a harder price challenge. Corporate filings value his award at more than $413 million. For him to get the first of nine bundles of shares in the award, DoorDash’s stock has to average 185 percent or more of its I.P.O. price over a 180-day period. The stock is now 18 percent below that level.

But fulfilling the award’s conditions could lead to a staggering payout. The first batch of stock alone would be worth nearly $100 million at the target price. To get the entire award, the stock would have to rise to 500 percent of the I.P.O. price. If achieved, at the final target price, the total stock award would be worth over $5 billion.

Whatever happens to the 2020 stock award, DoorDash has already made Mr. Xu a rich man. His current DoorDash stake is worth roughly $2.8 billion.

“DoorDash is a relatively young company with an ambitious vision for what it can do for merchants, consumers, Dashers and communities,” the company said in an emailed statement. “Building the next phase will be as challenging as creating what we have thus far, and the board has structured Tony’s compensation to maximize the incentive towards those long-term goals on behalf of our stakeholders.”

A hard-to-earn stock award may lose much of its incentive power if a C.E.O. gets a separate grant with few strings attached at around the same time. That happened at Opendoor.

Mr. Wu of Opendoor got a large stock grant for 2020 that is dependent on hitting stock price targets, some of which are well above the current price.

But the company disclosed in a filing that he also received a separate stock grant — one without price hurdles. That stock, which vests over four years and is not included in his 2020 total compensation figure, is worth over $90 million at current prices.The company declined to comment on the arrangement but pointed to a filing, which said its compensation program was designed to “attract and retain highly qualified executives” and “allow employees the opportunity to be owners in the company.”

Brian Chesky, chief executive of Airbnb, received an award valued in a company filing at $120 million, putting him eighth on the Equilar ranking. But he said he would do something uncommon with his latest grant. Mr. Chesky pledged to give away his entire 2020 award.

That award could end up being worth far more than $120 million. At Airbnb’s current stock price, for example, Mr. Chesky is already well on course to get the award’s first batch of stock, which, on its own, would be worth $178 million at the current price. The whole award, if he qualified for it, would be worth $5.8 billion at the highest price target.

Mr. Chesky said he intends to donate all net proceeds to unnamed philanthropic causes.

Shareholders can’t easily stop companies from granting rich executive compensation packages, but since 2011 those able to vote (mutual fund shareholders can’t vote directly) have been able to express their disapproval through advisory “say on pay” proxy votes.

Opponents of pay packages scored notable victories in such voting at Starbucks and General Electric this year. While “say on pay” votes are nonbinding, shareholders can also vote against company-supported directors.

That happened at Paycom, a payroll and human resources software company, whose chief executive, Chad Richison, was the fourth largest earner last year with compensation of $211 million, consisting almost entirely of a stock award.

Shareholders opposing the compensation won a say-on-pay vote at the company, and a majority also withheld votes from a director on the board’s compensation committee. Under Paycom’s governance guidelines, the director had to tender his resignation. The board’s nominating and corporate governance committee did not accept it, however, instead reaffirming his appointment, according to a company filing.

“That’s highly unusual,” said Mr. Varner of CtW Investment.

Asked whether Mr. Richison’s stock grant had fueled the shareholder discontent, Jason Clark, the chairman of Paycom’s compensation committee, said in statement: “This award is entirely dependent on Mr. Richison achieving aggressive performance goals — which will generate tremendous value for our stockholders.”

Until now, Amazon has rarely featured in C.E.O. pay rankings because Jeff Bezos, its founder and one of the richest people in the world by virtue of his roughly $170 billion stake in the company, has taken relatively little in annual compensation. His pay as C.E.O. of $1.7 million last year was 58 times that of the median employee, a relatively low ratio.

But the reality is that the median Amazon employee, who made $29,007 last year, is paid well below the $80,833 received by the median employee in the Equilar survey. The Amazon pay ratio is low only because of Mr. Bezos’s modest annual compensation.

What’s more, Amazon’s median pay rose only $159 from 2019, although the company did supremely well in the pandemic, posting a hefty increase in sales and an 84 percent increase in profits.

Now, though, Mr. Bezos is stepping down as chief executive, to be replaced in July by Andrew Jassy, currently head of the company’s web services business. Last year Mr. Jassy earned $35.8 million, or 1,234 times that of the median worker. His new employment contract, when it appears, could reveal even higher compensation.

In a statement, Amazon said that for employees in the United States, where the company has three-fourths of its work force, median pay was $37,930 last year, up from $36,640 in 2019.

“Of the 400,000 employees who joined Amazon in 2020, 60 percent now make more than in their previous jobs, and 45 percent were unemployed before joining the company,” the company said.



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