Executive Compensation: How Should Internet CEOs Be Paid?

Executive Compensation: How Should Internet CEOs Be Paid?

When it comes to executive compensation, some plans are more shareholder-friendly than others. Among large-cap Internet companies, it’s pretty common for executive compensation to be linked to execution, whether in qualitative or strategic measures. Also equity awards are a huge trend right now.

Executive compensation for founder-CEOs versus non-founder CEOs

Morgan Stanley analyst Brian Nowak and team reviewed the executive compensation plans employed by some of the biggest names in Internet right now to determine how well they align with shareholders’ interests. They picked up on several interesting trends such as a key difference in how founder-CEOs are compensated versus compensation for non-founder led firms. They then summarized their findings in an August 31 report titled “Executive Compensation: Is it Aligned with Shareholder Interests?”

Between 2013 and 2015, large-cap Internet firms paid their CEOs an average of $9.5 million per year in cash, equity and other compensation. However, founder CEOs received much less annual compensation, while non-founder CEOs received more. In some cases, founder CEOs didn’t receive any annual compensation. On average, non-founders received about $25.8 million per year.

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The Morgan Stanley team reports that non-founder CEO compensation made up 8 basis points of market capitalization, on average. Expedia’s chief was at the top at 61 basis points of market cap, while its competitor Priceline sat at the bottom at 2 basis points. The average of 8 basis points is 1.4 times higher than the average of companies in the S&P 500, which is about 6 basis points, they reported.



Executive compensation is based on equity

Nowak and team said that of the Internet firms in their coverage universe, share price matters quite a deal, as about 80% of annual CEO compensation and 90% of annual CFO compensation came in equity awards through either restricted stock units or options.


When combing that with the average vesting period of around four years for the equity awards, it becomes clear that long-term growth and execution are the focal point of compensation for Internet executives. The Morgan Stanley team noted that Amazon’s vesting period is the longest of their group at six years, and they actually prefer equity-based, long-term compensation structures such as these examples because they place the interests of executives in alignment with shareholders’ interests.


Factors driving equity awards

The analysts said five of the eight companies in their coverage mostly use qualitative or strategic factors to determine how much in equity executives should receive. In many cases, the metrics are open-ended factors such as competitor compensation, past and expected corporate contributions, personal goals, performance and other areas. Included in this first group are Amazon, Facebook and Google.



However, they classify a second group which includes Priceline, eBay and Yahoo, all of which set specific financial and quantitative goals. They explained that Priceline, for example, pays its executives entirely based on performance metrics in restricted stock units paid on three-year cumulative adjusted EBITDA targets.


Nowak and team actually sees financial and quantitative metrics as being preferable to qualitative or strategic factors because they offer greater transparency. However, they add that in some cases, qualitative factors such as improving engagement or integrating an acquired asset are critical in the Internet space, which is constantly and quickly changing and highly competitive in terms of attracting and keeping the top talent.

Cash bonuses also a key part of executive compensation

The Morgan Stanley team also highlighted how cash bonuses play a role in executive compensation at six of the eight Internet companies they studied. However, cash bonuses made up a much smaller part of total CEO and CFO compensation, at 13% and 11%, respectively, over the last three years. Again, financial and qualitative factors play a role in determining the size of the compensation:





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