How much is Marissa Mayer's pay package really worth?
By my calculations, if Ms. Mayer, the newly appointed chief executive of Yahoo, sticks around for five years, her contract will be at least $117 million. This is the minimum amount. Ms. Mayer can earn much more depending upon Yahoo's performance - and assuming that she can avoid the fate of previous Yahoo chiefs who were quickly terminated.
Let's start by breaking down the Ms. Mayer's compensation as outlined in her employment agreement. The chart below sets forth my estimates of potential pay if Ms. Mayer stays employed as chief for five years.
The mix of various forms of compensation makes Ms. Mayer's pay state of the art in employee compensation and a good lesson in this sometime mysterious practice.
Let's examine these item by item.
Base Salary
Under her contract, Ms. Mayer will be paid a cash salary of $1 million a year.
This round, six-figure number is no coincidence.
< p>In 1993, Congress prohibited companies from taking a tax deduction for nonincentive pay for executives if it exceeded $1 million. The goal was to reduce executive compensation, but it had the opposite effect.The pay of many chief executives who earned than $1 million rose to this number. In addition, companies began offering significantly more incentive pay to ensure that the pay would be tax deductible. Ms. Mayer is a textbook example of this development.
Incentive Compensation
Ms. Mayer is also eligible for a yearly cash bonus of up to $4 million, which is essentially guaranteed to be a minimum of $2 million if certain financial goals set by the board are met.
We haven't been told what the goals will be, but for now, let's assume that Yahoo does meet these goals and Ms. Mayer is eligible for the maximum amount, since most cash bonus targets are typically easy to reach.
One-Time Equity Award
Ms. Mayer is receiving a one-time grant of Yahoo stock worth $30 million. It vests over five years, with 20 percent of the stock sellable each year, assuming she hits the yet- to-be-determined performance criteria.
Yahoo probably paid this grant in one lump to sidestep criticism over excessive executive compensation and minimize the chance of shareholders voting against it in a “say on pay†vote. The influential proxy advisory firm Institutional Shareholder Services will assess the pay package, but only once a year. This will mean that for this year, Yahoo will be out of sync with its peers and may be criticized for excessive pay. But next year, the payout will not show up as a new award, so Yahoo will look more reserved. Voila.
Big, one-time grants are something that companies like Apple and Yahoo are increasingly doing to avoid paying higher salaries over multiple years and suffering repeated criticism.
“Make Whole†Grants
Since she left Google and lost the chance to earn bonu ses at that company, Ms. Mayer will get a one-time grant of Yahoo stock worth $14 million. She again will be able to vest, or cash out, portions of that over three years. Ms. Mayer will need to be employed by Yahoo at the time for these awards to vest, but if she is terminated without good reason, they automatically vest. But chief executives are almost never terminated for cause â€" like fraud or some other troubling deed. Therefore, Ms. Mayer is likely to receive this award even if the Yahoo board terminates her for poor performance.
A “make whole†award is common to compensate executives who have huge amounts of stock from their previous job that they will lose. The problem is that if Ms. Mayer's term is short and her performance poor, Yahoo will look like it unduly compensated Ms. Mayer by paying this amount as Ms. Mayer is almost guaranteed to receive it.
Long-Term Equity Grants
Ms. Mayer will also get $12 million in stock and options under Yahoo's general incentive compensation program â€" which will vest over a three-year span. This means that in the first year, she will earn vested incentive grants of $4 million.
However, her agreement also states that for future years the grants will be the same or more than the 2012 grant of $12 million. So you can expect next year's award to be at least as much as the previous year's. Assuming that Ms. Mayer receives the minimum $12 million grant, by Year 3, $12 million worth of options are vesting every year.
As is de rigueur in the technology industry these days, the grants are a mix of half options and half restricted stock. According to a 2011 PricewaterhouseCoopers analysis of 50 technology companies, 78 percent granted a mix of incentive options and stock.
After the Internet bubble, many tech firms moved away from awarding just stock options. Options were considered too volatile and dilutive of shareholders' stakes. In addition, options ofte n quickly inflated the executives' payouts to eye-popping levels just because shares were rebounding after hitting lows. As a result, restricted stock became more favored, but in Silicon Valley, some amount of options are still expected â€" probably as a result of custom more than anything else.
The options and restricted stock will also be subject to be determined financial performance criteria that will be the same as the one time equity award.
All in all, Ms. Mayer's package is rich. I estimate that it is about $34 million more than what the most recent chief, Scott Thompson, would have made under his agreement if he had stayed for five years.
But to really cash in, Ms. Mayer will not only have to stay at Yahoo for several years but also hit financial goals, which have yet to be defined. In other words, much of her success and money will mean hitting those targets. It remains to be seen whether they will be meaningful targets, but Daniel. S. Loeb, th e head of the activist hedge fund Third Point, which owns about 6 percent of Yahoo, has a big stake in seeing her achieve significant gains.
If Ms. Mayer hits her targets and stays for five years, the $117 million figure I estimate is really just a base. The estimated $92 million worth of equity compensation she would realize means Ms. Mayer can reap hundreds of millions or more if Yahoo's stock goes up with her success.
At the same time, at least one study has found the average chief executive tenure to be only six years. Yahoo has run through seven chief executives in less than five years (including two interim ones), and Mr. Loeb, who has been advocating for change at Yahoo, is unlikely to wait long for results.
Ms. Mayer is therefore taking real risk. If she leaves in Year 2, she would receive substantially less. Even if she stays, most of her incentive pay is worthless if the company does not meet financial goals and its stock does not increase.< br />Marissa Mayer may win big, but she's going to have to stay with Yahoo for the long haul to do so, which may not be so easy.
YAHOO CHIEFS' PAY
Comparing compensation packages
| Marissa Mayer's Pay, in Millions | |||||
| Incentive Compensation is targeted at $2 million and is a maximum of $4 million. Long Term Equity Grants assume that future grants are equivalent to current grant of $12 million in incentive grants and vest over three years. | |||||
| Scott Thompson's Pay, in Millions | |||||
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
