By Scott Patterson – Compensation Analyst Team Leader
The revolving door for CEOs at Yahoo! may have shareholder’s heads spinning and wondering in what direction the company is going. The confusion about who is going to run the company can be matched by the confusion generated by its description of the fiscal year 2011 compensation awards for FY2011.
Let us start with the Executive Incentive Plan (EIP). The EIP calls for the attainment of set targets relative to Revenue ex-TAC (excluding Traffic Acquisition Costs) Growth and ex-TAC Operating Margin along with individual goals. These performance measures turned out to be moot. The company failed to attain the targets; revenue growth rate target was set at 3.4% with a result of -6.1% and the operating margin of 17.6% was shy of the 19.6% target. Despite missing the targets, executives still received 50% of target as it is stated in the CD&A; “Minimum and maximum EIP Funding Percentages of 50 percent and 200 percent were established, with the minimum level being provided in order to promote retention.”
A one-year cash incentive plan with a retention award built in is one way to prevent the departure of talent, or is it? The odd thing about this plan is that Carol Bartz departed in September with an extra $477,534 thanks to the “minimum level being provided in order to promote retention.” Other executives earned 50% of their 120% salary target. If you are going to have an incentive plan then have some set incentive measures and if you want it to have retention value then at least have a retention requirement, not an automatic payment under the guise of retention. It is probably best to just separate the two.
To make matters even more interesting is that the same measures were used for performance-based restricted stock units (PRSUs). Instead of having an automatic minimum payment, however, the company simply adjusted awards. To quote at length is easiest:
In determining the Company’s actual performance for 2011, the Company’s revenue ex-TAC and ex-TAC operating margin were based on the Company’s 2011 revenue and operating margin reported in its financial statements and adjusted in accordance with the terms of the awards to account for events not contemplated by the Compensation Committee in setting the performance targets. Specifically, adjustments were made to mitigate the financial statement impact of acquisitions and divestitures, restructuring charges (net of stock-based compensation expense and non-cash items), certain legal settlements, changes in foreign exchange rates, and certain costs and changes in revenue presentation related to the Search Agreement. The Company believes that performance goals should be made no easier (or harder) to achieve because of transactions or events such as these that were unforeseen when the performance goals were established. Accordingly, these adjustments were provided for in the terms of the awards to preserve the level of incentives that were intended when the 2011 performance goals were established.
Applying the methodology described above, the Compensation Committee determined that 50 percent of the units eligible to vest based on 2011 performance would be credited to the executive holding the award.
Again the 50% rule; why move the ball when you can just move the goalposts. If the company was “intending” to make awards at certain levels then why not just award them and not have compensation analysts dig through all the jargon about performance measures. At least the PRSUs have a three-year retention requirement so you have to stay to receive vesting powers. Yahoo! is a little concerned with retention and rightly so as they have moved on from Ms. Bartz to Mr. Morse to Mr. Thompson and have settled in with Mr. Levinsohn as CEO for the moment. To ensure some stability he was awarded a new-hire grant of 175,000 time-based vesting RSUs (ratably over 4 years) upon joining the company and then in November 2011 another 75,000 RSUs were granted that vest after 2 years. Perhaps with all these retention awards the company will be able to settle in and make shareholders happy, or at least content.
To make things easier for compensation analysts, as well as for executives, the company has announced that it plans drop performance requirements altogether and go with stock options and time-based RSUs only for 2012.