Marissa Mayer has hit it big in the executive compensation lottery.
According to recent public filings and an analysis prepared by Equilar, an executive compensation data firm, by the end of last year, Ms. Mayer, the Yahoo chief executive, had received compensation worth potentially $214 million â€" most of which was for doing nothing.
Her good fortune stems from Yahoo’s stake in the Chinese Internet behemoth Alibaba, a deal that was arranged in 2005 by Yahoo’s co-founder, Jerry Yang. The enthusiasm and hype over a likely initial public offering by Alibaba has driven Yahoo’s stock to a sky-high valuation, a surge that has showered Ms. Mayer with vast riches.
Huge compensation packages for corporate chieftains are not uncommon, of course, and remain the subject of a fierce debate. Yet, the example of Ms. Mayer highlights the absurdities of executive compensation based on stock prices.
When Ms. Mayer was hired away from Google in 2012, it was meant to show that Yahoo, a faltering Internet giant, was again going to be a dynamic and hip place to work. To lure such a rock-star executive, Yahoo awarded her a pay package of $35 million in restricted stock and $21 million in options.
Some $15 million of that was to compensate Ms. Mayer for stock and options she forfeited when she left Google. At the time of her hiring, Yahoo shares were trading at $15.78 a share.
Since then, Yahoo’s stock has been on a tear, reaching a high of $41.72 before retreating in the recent technology sell-off to about $34. It’s up about 140 percent since Ms. Mayer arrived.
As a result of the rise in the stock price, Equilar calculates, Ms. Mayer’s $56 million package had grown to be worth about $186 million as of the end of last year, after Ms. Mayer forfeited some of the stock for failure to meet some performance requirements. In addition, Ms. Mayer was awarded $12.47 million worth of restricted stock in early 2013 that had grown to $23.7 million by year-end. Add in $4.3 million in cash paid to Ms. Mayer, and the figure rises to about $214 million for 15 months of work.
To be sure, for some of this compensation, Ms. Mayer will have to stay at Yahoo for another few years and meet performance goals. And Yahoo’s stock price will have to stay at this level. Yet $57.8 million worth of Ms. Mayer’s stock and options already vested last year alone.
By any measure, this was not the value initially intended to be paid to Ms. Mayer.
These are estimates, because after spending a few hours with Yahoo’s public filings, I found it impossible to calculate an exact figure of her earnings from Yahoo and had to turn to Equilar.
A spokesman for Yahoo declined to comment but directed me to the compensation figures in the proxy.
If you read Yahoo’s filing for its shareholder meeting, it states in a summary compensation table that Ms. Mayer was paid $61.5 million for 2012 and 2013, an amount the filing notes is based not on the current value of Ms. Mayer’s compensation but the value when granted. Nowhere does it say with a single number what Ms. Mayer’s package is worth as of year-end or even what she actually made last year â€" that $57.8 million figure.
A paycheck of more than $200 million is sweet, but the problem is that the value is not primarily a result of anything she has done as chief executive. Yahoo continues to struggle â€" its revenue last year was $4.68 billion, down from $4.98 billion in 2012. In the first quarter of 2014, Yahoo’s income fell 84 percent, to $30 million from $186 million in the quarter a year earlier. Moreover, there has been a bit of turmoil in Yahoo’s executive suites. Ms. Mayer’s trusted lieutenant, Henrique de Castro, who was hired to assist the turnaround, was recently fired as chief operating officer.
Still, Ms. Mayer has some achievements at Yahoo. She has revamped products and replaced much of Yahoo’s staff while reversing two years of losses in the number of people using its sites and services. All told, it’s too soon to know what will happen to Yahoo, and certainly those gains are not what is driving its stock price up right now.
For now, however, Yahoo still holds its crown jewel, its stake in Alibaba.
Yahoo initially bought 40 percent of the Chinese company in 2005. Yahoo sold part of it back to Alibaba in 2012 for $7.6 billion, but retained a 24 percent stake.
Since then, Alibaba has been growing rapidly and is expected to go to market in the coming months in an I.P.O. that may value the company at more than $150 billion, and Yahoo’s stake at $36 billion.
The noise over the Alibaba I.P.O. has drowned out nearly anything Yahoo says about its own business.
Even when Yahoo recently announced the decline in quarterly earnings, its stock jumped as much as 9 percent. It didn’t hurt that Yahoo also reported that Alibaba’s revenue growth had risen 66 percent in the fourth quarter of last year.
An analyst with SunTrust Robinson Humphrey has calculated that Alibaba now adds about $29 to every Yahoo share, assuming that the Chinese company is valued at $150 billion after its I.P.O. Yahoo’s stock closed on Tuesday at $35.83 a share.
Simply put, without Alibaba, Ms. Mayer’s options would probably be close to worthless and her package would be worth about $10 million.
In other words, Alibaba has most likely added most of the money to Ms. Mayer’s pocket, money from her pay package, a pay package intended to provide performance incentives.
What did Ms. Mayer do for this windfall? Sure, she is working hard and getting early results, but not at Alibaba. The Chinese company is managed by Jack Ma and his partners. It appears to want little to do with Yahoo, and has been pushing for Yahoo to sell its stake down. Indeed, as part of an Alibaba I.P.O., Yahoo has agreed to sell 40 percent of its stake, but can hang on to the rest indefinitely.
Ms. Mayer is not alone in her fortunate payday. Mr. de Castro received $58 million when he was pushed out less than a year and a half after his hiring. His pay package when hired was calculated to be worth $17 million by Yahoo.
Such paydays illustrate that it is often good fortune â€" a rise in the stock market or a turn in the economy â€" rather than individual performance that accounts for the bulk of executive pay.
Despite the good luck of Ms. Mayer and others, option and incentive compensation persist, spurred by government subsidies through favorable tax treatment and the fact that, unlike cash, stock compensation appears to cost the company very little to award. Not only that, companies are not required to disclose how much they miss the mark in awarding initial compensation.
It’s time to recognize that stock-based compensation can often be no more than casino chips. Stock is easy for a board to hand out without regard to the true cost, creating a huge win for executives in a game stacked in the chief’s favor.
Ms. Mayer’s case is extreme, but it shows it is time to rethink all stock compensation. Instead, executives can simply be paid in cash based on their effort â€" a novel concept to be sure.
