We’ve touched on the stickiness of executive compensation and how it’s supposedly driven up by their company’s performance in terms of their bottom line and for publicly listed companies their respective stock prices. As news of Microsoft’s Nadella accumulating a whopping USD 1 Billion in compensation due to Microsoft’s recent performance during his 9-year tenure so far. As Microsoft continues funding its AI plans, the resurgence of Tech in recent months, and if his plan for Microsoft to target USD 500 Billion in revenue by 2030 starts off without a hitch, it’s safe to say that that number will keep climbing higher as heads Microsoft – but does he deserve it?
Well, given that news outlets are pointing out that Microsoft stock has risen 1,000% since he started in 2014, it would seem that he apparently does deserve it. However, as we’ve laid out before, executive compensation doesn’t necessarily match up with performance of the company, Microsoft being an exemption to that rule. Let’s now go into how various factors that go into assessing executive compensation such as financial performance, stock price movements, and sometimes it even includes Goodwill. Goodwill, which is basically an accounting term for good branding and an expected premium when measuring compensation or sale value of a company.
Generally speaking, executive compensation is a mix of four main component mixes that must be considered: straight up Cash (that come in the form of salaries, discretionary bonuses, or profit-sharing schemes) versus Equity (stock options or the like), long-term incentives versus short-term incentives, and variable incentives versus a fixed base. This of course differs from industry to industry in the cash versus equity component, with growing industries such as Tech mostly focused on equity while industries that have plateaued like utilities would be focused more on cash-based incentives. On the other hand, most industries prefer long-term and variable incentives: which tracks in the case of Nadella, as most news outlets disclosed that they arrived at the USD 1 Billion earning of Nadella through parsing regulatory filings on equity grants, salary, bonuses, and dividends.
The last major component of determining executive compensation structure is private companies versus public companies. Private companies, as the name implies, are more difficult to obtain data for as most regulatory filings are under less scrutiny and are well.. private. Financial statements disclosures will rarely include executive compensation breakdown for private companies. However, we do know that private companies tend to favor not offering equity and usually have less competitive incentives as compared to public companies. Now, for those CEOs from public companies (or generous private one’s), the compensation gets a lot juicier as the equity component of their compensation package can come in the form of stock options, restricted stock units and stock appreciation rights. Stock options being the most favored long-term incentive and allegedly makes up 60% of total direct compensation packages for executives. While the breakdown of overall compensation structure is estimated to be at 30% being attributed to salary, short-term incentives (i.e., bonuses) are at 20%, benefits at 10%, and long-term incentives (i.e., stock options, etc.) at 40%. The next piece of this puzzle of course is how should we measure their performance, goodwill anyone?