In today’s market, poor performance still pays off

Executive awards have even affected the markets. A study published in 2001 in the National Bureau of Economic Research posits that Dot.com’s corruption was precipitated in part by expiring shutdowns in the wake of the influx of bloated public offerings. This seems less likely this time because many shares will remain inaccessible to executives for years. Moreover, market valuations have taken a hit this year, which now makes the draw relatively less attractive. But how pay packages are designed can motivate short-term strategy at the expense of long-term results.

Take the Robinhood Markets trading platformAnd the

Hood 4.35%

Its stated mission is to “democratize finance for all”. Last year, co-founder and CEO Vlad Tenev took home an estimated $800 million compensation package even though the shares ended the year down 53% less than six months after their initial public offering. So much to rob the rich and give to the poor.

Surely Mr. Tenev would probably not take home anything close to that sum. To achieve his full market-based rewards, for example, the company’s stock, which is currently hovering above $7, must rise to $300 by May 2029, according to Robinhood’s proxy filing. However, a large portion of his earned salary came in the form of previously awarded stock awards which were awarded upon completion of the IPO. The proxy filing shows that Mr. Tenev received $168 million last year in realized gross compensation, most of which was in the form of vested shares. Shareholders will be pardoned if they think that is still somewhat high.

Similarly, Compass Real Estate Technology Company‘s

COMP 5.56%

CEO, Robert Rifkin, received total realized compensation of more than $58 million last year, according to an analysis by executive compensation research firm Equilar, mostly in the form of vested shares.

This was just over 60% of his total compensation package, even though the company missed all eight stock price targets outlined in his performance award package. Compass closed its first day of trading last year at $20 and is now under $4.

According to the proxy statement, Mr. Reffkin’s realized stock award was based on his service to the company, as well as the company that achieved the IPO. He has not sold any of the acquired shares, according to the company, which is now equal to about a third of the value documented in the power of attorney at the time it was granted.

Peter Rawlinson, CEO of Lucid, the electric vehicle makerAnd the

LCID 6.95%

It received a 2021 compensation package worth over $565 million, consisting mostly of potential stock awards. The newspaper reported earlier this month that he had gained full access to the shares, which are now valued at about $300 million. A Lucid spokesperson told the newspaper in that report that Mr Rawlinson would not see any cash benefit because he had not sold this recently acquired stock.

According to the proxy filing, 45% of Mr. Rawlinson’s CEO grant for reserved stock units is based on his continued employment over a four-year period. The majority based on performance includes Lucid achieving five market value targets over a five-year period, four of which the company’s board of directors concluded actually met in March 2022. Since then, the company has lost nearly a third of its value, and is now down nearly 70%. from its highest level after the IPO. The company, which generated revenue late last year, reported a loss of more than $4.7 billion in 2021 after favored dividends. Lucid did not respond to requests for comment for this article.

Other companies appear to have executive payouts that align better with long-term shareholders’ interests. Electric Truck and SUV Maker RivianAnd the

Which was also listed last year, awarded CEO RJ Scaringe a 2021 pay package of $422 million, according to the company’s proxy filing. However, he cannot acquire full ownership of a majority of his shares until a multi-year period beginning in 2027, when the company begins to evaluate its performance metrics.

Or Take Affirm Payment.

Its shares are down nearly 31% from where they closed on their first trading day in early January 2021 through the end of the company’s fiscal year in June 2021. CEO Max Levchin received just over $165,000 in a wage package that’s notionally worth more than 450 million dollars, and Equilar found that nearly all of it consisted of potential option prizes.

Mr. Levchin’s salary package depends almost entirely on share price performance, according to Affirm’s proxy filing. But its structure appears to motivate both his continued employment and his continued share gains: while the filing shows two of 10 stock price hurdles had been met by the end of the last fiscal year, those options become exercisable annually, starting with just 15% of the options vested.

The founders of the company take great risks and deserve to be compensated for it when they succeed. Entrepreneurship is the driver of economic growth and job creation and can make the world a better place. But the contributors who fund these salary packages deserve to have their own interests taken care of, too. Otherwise, they may refrain from investing in IPOs and harm the capital markets.

As in earlier periods of market euphoria, today’s investors cannot count on anyone else to do their homework. Despite the market’s shift, IPO filings are still going. As of Thursday, 434 companies have provided registration data for this year, according to an analysis by S&P Global Market Intelligence. Potential buyers would do well if they read the fine print.

write to Laura Foreman at [email protected]