Netflix Keeps Compensation Policy Despite Shareholder Discontent
April 30, 2020

The world is at home binging Netflix, and its top brass continues to reap the benefits. Netflix CEO Reed Hastings’ 2019 total compensation topped $38M while Chief Content Officer Ted Sarandos’ topped $36M, according to their recently filed annual proxy statement.

Netflix pays all employees (including their named executive officers) only in cash and fully vested stock options (excluding “limited” perquisites). Most public companies typically include a mix of cash salary, stock awards, non-stock bonus payments, and stock options. Oftentimes these stock awards (RSUs / PSUs) and options won’t vest for a number of years following the grant. A feature designed to encourage employee retention at the company while setting up for long-term shareholder success.

Netflix takes the position that awarding fully vested stock options promotes long-term alignment between the company and shareholders. In their most recent proxy, compensation committee chair Tim Haley notes that Netflix stock “must appreciate 40%” for an employee to be better off receiving stock than cash.

Netflix shares have grown 735% since January 2015, compared to 56% for SPY

This practice has rankled existing shareholders a bit. In 2019, just 49.8% of voting shareholders approved the compensation of Netflix’s Named Executive Officers in their annual Say on Pay vote (this was down from about 61% in 2018).

Lead independent director, Jay Hoag, acknowledged some of the concerns about shareholder beliefs regarding Say-on-pay for the company:

“Our recent say on pay vote showed that there are concerns about our unique approach to pay. We welcome the input from our shareholders and have gained valuable insights during our conversations with many of you throughout the past year.”

While the compensation committee “considered shareholder feedback” they largely shrugged off the vote and stopped short of implementing any structural changes for 2020 compensation. They instead opted for clearer descriptions of the plan in this year’s proxy.

Cash vs. Options

Netflix employees, including CEO Reed Hastings, personally allocate their compensation splits in cash vs. options. In the case of Mr. Hastings, he has increasingly elected a larger portion of his compensation in options over cash.

Source: Netflix, Boardroom Alpha

This while Netflix Stock price has seen an almost meteoric rise – suffice to say the election of a larger percentage of equity has reaped huge financial benefits for Mr. Hastings. According to the proxy, the weighted average strike price of his options is $320.44. Netflix shares recently closed at $420. The options expire 10 years after the grant date, and Mr. Hastings typically holds on to them for nearly the full 10 years.

Hastings again is betting on himself and the Netflix team in 2020 by choosing an even more aggressive 98.1% / 1.9% split between options ($34M) and cash ($650K).

Compensation Elections by Executives

The other named executive officers at Netflix elect to take a much higher portion of their annual compensation in salary vs. equity options:

For 2020, the officers have also upped their percentage of compensation of stock to an average of 58%, up from 44% (for officers active in 2019 and 2020).

Take Away

It’s hard to argue that Netflix shareholders haven’t enjoyed an unprecedented rise in shareholder value in recent years, however it might be fair to question their concern with such a large portion of immediately vested equity options getting awarded to NEOs.

We will see following this year’s say on pay vote whether the additional clarity around executive compensation is enough to quell the unrest, or if it will continue to be a hot spot for the board.

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