ready,fire,aim
why do smart people get dumb about exec pay packages?

It is being widely reported today that Yahoo’s new COO has been granted a pay package worth 62M over 4 years.  I don’t know him, and I don’t have an opinion about whether or not he is worth what is under any circumstances a very rich package.

What is bugging me today is how poorly executive compensation is being reported on by journalists who are clearly smart enough to know better.  This has always kind of bugged me.    Very smart reporters who MUST understand the difference between guaranteed compensation and incentive compensation consistently gloss over the difference.  

Here, in plain english is what Yahoo is paying DeCastro:

-  600k per year in salary (pretty standard for a c-level exec in this industry and a company Y’s size)

-  540k per year in target bonus (also pretty standard)

-  1 million dollars in cash as a sign on bonus (they call it a make up grant).  He loses this if he doesn’t stay 6 months, which is unlikely.

-  20M of restricted stock (RSUs), vesting monthly over 4 years.  The value of this at today’s stock price is 5M per year.  if the stock price moves up, it could be more.  if it moves down it could be less.

-  18M of restricted stock that vests 25% on his 1 year anniversary and 1/36th for each month thereafter to his 4 year anniversary.  This is worth 4.5M per year, and like the RSU’s above could be worth more or less based on movement in Yahoo’s stock price.

-  18M of stock options, vesting 25% on his 1 year anniversary and 1/36th for each month thereafter to his 4 year anniversary.  This is NOT worth 4.5M per year as most reporting on the subject might suggest.  With stock options, the value will only be the appreciation in the value of each share above the current stock price.  The easiest way to think of this is as a % appreciation.  If the stock goes up 50%, then the grant is worth 50% of the value (or 9M dollars).  In order for the grant to be worth 18M, the stock has to double.  In this scenario, if he’s doing a good job, the company will not begrudge paying him this. 

To further break it down, here’s what the numbers look like if you assume Yahoo’s stock stays flat, he earns 100% of his bonus and the executive quits:

Stays more than 6 months but less than 1 year:  Total pay is pro-rata portion of 600k salary and 540k bonus (not guaranteed), 1M signing bonus.  Total value is between 1.5 and 2.1M

Stays 1 year:  600k+540k+1M+9.5M of RSU value+$0 of stock option value = total of just over 11.5M

Stays 2 years:  (600k+540k)x2+1M+18M of RSU value+$0 of stock option value = total around 21M

Stays 3 years:  (600k+540k)x3+1M+27M of RSU value+$0 of stock option value = total around 31M

Stays 4 years:  (600k+540k)x4+1M+36M of RSU value+$0 of stock option value = total around 41M

Is it a rich pay package.  Hell yes.  Does it come close to guaranteeing 62M as much of the reporting on the package suggests?  Hell no.

I think most of the reporters who cover this industry are smart enough to figure this out.  After all I just did it in 5 minutes from a single SEC filing.  If folks want to be outraged about executive pay - go for it…just please be informed about what you are talking about, and a little less lazy in the reporting around this subject.

  1. misterhippity answered: YEAH, it’s really worth only„ like, probably FORTY ONE MILLION DOLLARS so stop exaggerating you stupids!
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