In Today’s Market, Poor Performance Still Pays

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If you’re looking to invest in the next public offering, read the fine print. Some executives’ compensation is better aligned with shareholder interests than others.

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Executive awards have affected the markets as well. A study published in 2001 in the National Bureau of Economic Research suggests that was exposed to lockups that ended after an influx of bloated public offerings. It seems less likely this time around as many shares will remain inaccessible to executives for years. Also, the market valuation has dropped drastically this year, making cash outs less attractive now comparatively. But how salary packages are designed can encourage short-term strategy at the cost of long-term consequences.

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Take the Trading Platform Robinhood Markets,

Whose self-declared mission is “Democratizing Finance for All”. Last year, co-founder and chief executive Vlad Tenev was awarded a compensation package valued at approximately $800 million, despite holding 53% of the shares that ended the year less than six months after its initial public offering. had declined. So much to rob the rich and give to the poor.

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Granted, Mr. Tenev probably won’t take home anything close to that amount. According to Robinhood’s proxy filing, to realize its full market-based rewards, for example, the company’s stock, currently hovering above $7, would have to climb to $300 by May 2029. Nonetheless, a substantial portion of his actual salary came in the form of pre-paid stock awards that were vested upon the completion of an IPO. Mr. Tenev received $168 million in total compensation last year, proxy filings show, mostly in the form of vested stock. Shareholders would be forgiven for thinking that still sounds like too much.

Similarly real estate tech company Compass‘s

The chief executive, Robert Rafkin, received compensation totaling more than $58 million last year, mostly in the form of vested stock, according to an analysis by executive compensation research firm Equilar.

This was just over 60% of his total compensation package, despite the company missing all eight stock-price targets mentioned in his performance award package. The Compass closed its first day of trading last year at $20 and is now below $4.

According to a proxy statement, Mr. Rafkin’s actual stock award was based on his service to the company as well as the company receiving the public offering. According to the company, he has not sold any vested shares, which are now worth approximately one-third of the value recorded in the proxy at the time of his award.

Peter Rawlinson, CEO of electric car maker Lucido,

Was awarded a 2021 salary compensation package worth more than $565 million, composed primarily of potential stock awards. The Journal reported earlier this month that they now have full access to nearly $300 million worth of shares. A Lucid spokesperson told the Journal in that report that Mr. Rawlinson would not see any cash gains because he did not sell vested stock recently.

According to the proxy filing, 45% of Mr. Rawlinson’s CEO grant of reserve stock units is based on his continued employment over four years. The performance-based majority involves meeting five targets for market capitalization over a five-year period, four of which the company’s board of directors concluded they had already met in March 2022. Since then, the company has lost about a third. Its value, and it is now down about 70% from its post-IPO highs. The company, which first had revenue late last year, reported a loss of more than $4.7 billion in 2021 after preferred dividends. Lucid did not respond to requests for comment for this article.

Other companies find that executive pay is better aligned with long-term shareholder interests. Electric truck and SUV maker Rivian,

According to the company’s proxy filing, which also listed last year, chief executive RJ Scaring received a 2021 salary package of $422 million. However, they may not receive full title to most of their equity award until a one-year period beginning in 2027, until the company begins evaluating performance metrics for it.

Or take the payment company Affirm,

Its shares fell about 31% from where they closed on their first day of trading in early January 2021 to the end of the company’s fiscal year in June 2021. Chief executive Max Levchin received just over $165,000 from a salary package valued at more than $450 million, with Equilar finding that nearly all potential substitutes were made from awards.

Mr Levchin’s salary package is based almost entirely on share-price performance, according to Affirm’s proxy filing. But its structure appears to encourage both their continued employment and continued share gains: While the filing shows that two out of 10 stock-price constraints were met by the end of the previous fiscal year, those options vest and become exerciseable annually, starting with just 15%. Out of the earned options.

Company founders take a lot of risk and are eligible for compensation if they are successful. Entrepreneurship promotes economic growth, job creation and can even make the world a better place. But the shareholders who finance these salary packages are eligible to look after their own interests as well. Otherwise, they may shy away from investing in IPOs, hurting the capital markets.

Like previous periods of market excitement, today’s investors can’t rely on anyone else to do their homework for them. Despite the turn of the market, the public offering filing is still ongoing. As of Thursday, 434 companies had filed registration statements this year, according to an analysis by S&P Global Market Intelligence. Potential buyers would do well to read the fine print.

Laura Forman at [email protected]

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