I made this chart based upon data that was cited in a San Jose Mercury News article that I read in today’s Business section. When I read those numbers, it made me think, “What would this look like on a chart?” Reading it in print is one thing, but seeing it on a chart tells a pretty grim story. So what does this chart tell us? That as Netflix stock was plummeting, Reed Hastings’ stock option grants soared. Note that these awards were given each month listed in the chart. Rank and file employees get annual options grants, by the way.
I know that this chart paints a pretty bad picture. But if you add another data point to the graph, Value, then each grant would be worth approximately $1.25 Million, so obviously this was a pre-arranged package. So much for Hastings’ compensation to be tied to performance. Oh yeah, the compensation board will argue that the package will be reviewed yearly, and in Netflix’ case, they’ve indicated that Hastings’ comp package will be adjusted for this coming year based upon the performance of last year. That’s such a crock. The guy made some seriously bad moves last year which resulted in Netflix’ stock plummeting to almost a quarter of its value in just two months. Yet his compensation package guaranteed him a $1.25 Million monthly bonus irrespective of the performance of the company.
I wonder what kind of message that sends to Netflix employees?
Ever wonder why uprisings such as “Occupy” happen? You just have to read stories or hear accounts like the Hastings’ compensation package to find your answer. Look, I can totally buy into the leader of a company getting paid more than the rank and file, and in great times, I can see them getting handed handsome packages for their leadership. But what I can’t abide by is a situation like this where an executive’s compensation package is not adjusted immediately upon a loss in revenue or reduction in membership.
My thought is that if you’re going to tie compensation to performance, then at the very least, review performance with a high periodicity than just annually. And set up thresholds. For instance, at a certain net income level, an executive would get X in cash compensation and option grants. If there’s growth, then they would get more. But if net income falls or in the case of Netflix, there’s an exodus of customer base, then the compensation package would be adjusted down.
Makes sense, but the reality of the situation is that practices like this won’t be changing any time soon.