Conscious Compensation® Principles: Not transaction-dependent or exit dependent

Fred WhittleseyConscious Compensation: The Impact Compensation Blog, Pay and Performance: The Compensation Blog


One of the sources of extremely high pay to CEOs and other executives has been the compensation resulting from a “change in control” – when the company is acquired by another company, and several layers of cash and equity compensation are paid out at the time of the transaction. These payments may result merely from the transaction occurring (a “single trigger”) or from the executive’s termination after the transaction (a “double trigger”).

We don’t even need to wait for the transaction to occur to get an idea of how much would be paid if a company did get acquired.  There is a table in public companies’ proxy statements summarizing those potential payouts. Here’s an example from LinkedIn’s most recent proxy statement:

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There is much speculation about both Microsoft’s and LinkedIn’s motivation for the acquisition announced this week.  One theory is that LinkedIn’s stock price continued to languish and their heavy emphasis on stock-based compensation required a quick fix to avoid losing employees to competitors like Google, Facebook, and Amazon with higher-performing stock prices. Did LinkedIn shoot themselves in the foot with equity compensation?  Or did some of the top people have a tremendous incentive to take large amounts of money off the table?

The Puget Sound Business Journal published “Here are the biggest potential winners in the Microsoft-LinkedIn deal” listing co-founder Reid Hoffman realizing $2.84 billion, CEO Jeff Weiner with $95.6 million, and so on. These calculations are, according to the reporter, based on shares actually owned by the individuals.

Because public company executives have so many constraints on their ability to liquidate their stock holdings, a great deal of wealth “on paper” may not be easily converted to spending money and more diversified investments. Selling the company in a cash deal, or a stock deal with those constraints removed, provides a relatively quick way to turn all of that paper into cash.

On top of those shareholdings, there are the change in control payments.  The LinkedIn CEO, if terminated after the deal closes, would get another $40 million or more from his severance and change in control agreement.  This compares to his cash compensation last year of $2.1 million.

The combination of insider trading rules, stock ownership guidelines, the emerging use of clawbacks, and excessive performance contingencies on executive equity awards may, taken together, be a massive incentive structure to sell out. No matter how much a founder or employee loves their company and what they do every day, many believe that when someone offers you 20 times your annual compensation in a single payment, you can find other things to love.

If the heavy emphasis on equity compensation in a time of constrained liquidity for executives is creating an incentive to sell rather than continue to lead a sustainable organization, it may be time to fix this.

And no matter how many “winners” there are in a deal like the Microsoft-LinkedIn deal, a look at history shows who the losers are from these deals – Nokia employees, aQuantive employees.  Non-executive LinkedIn employees likely will do quite well from this deal and may not need employment afterward.  But they are not getting 20 times their annual pay.