I’m not knocking Rawlinson’s achievements: Lucid’s SPAC-listing raised $4.4 billion, customer deliveries have commenced and its luxury Air sedan has won rave reviews. Still, it’s doubtful Lucid’s board imagined him securing so much wealth so quickly. So far customers’ reservations for its debut vehicle are around 17,000. Lucid still has much to prove. A spokesperson referred me to various regulatory filings but otherwise declined to comment.
In the U.S., it’s become fashionable to reward top executives with large numbers of shares that vest when the price increases a lot over several years. Though controversial, these — in theory — align executive pay with the interests of other shareholders: If the stock goes up, everybody becomes wealthier.
One obvious risk, though, is that stock rises for reasons that don’t necessarily reflect the boss’s skill in running the business.
Besides the extreme frothiness that’s propelled the stock market to record highs, we now have the meme-stock phenomenon. I’m referring to stocks with prices that seem divorced from reality — buoyed by big followings among retail investors. Should an executive get a bonus because the Reddit crowd piles into their company? It’s not just a theoretical question.
Five top executives at loss-making sports betting firm DraftKings Inc. last year collected share awards then worth almost $500 million when a multi-year incentive plan (LTIP), put in place just months earlier, paid out. The shares quadrupled in 2020 when DraftKings went public via a SPAC. The plan included three metrics — revenue, profit and stock price — but the awards vested if just one of those were met.
The stock has declined 50% since a peak in March 2021 and is now below the level at which one third of the LTIP shares were earned. The company’s new LTIP incentivizes revenue growth, not a rising share price. DraftKings declined to comment.(6)
Though not quite on the same scale, AMC Entertainment Holdings Inc. boss, Adam Aron, was awarded an additional 500,000 shares when the stock of the struggling company took off in January and triggered a stock-price-based compensation plan. Those shares are now worth around $20 million.
The head of BlackBerry Ltd., John Chen, enjoyed a similar benefit when shares of the Canadian cybersecurity firm almost quadrupled in January amid widespread meme stock fervor. Three of his share-plan targets were likely met, according to an analysis by proxy adviser Glass Lewis, thereby unlocking 3 million shares now valued at more than $30 million. (2)
The vesting of the awards “as a result of extreme short-term stock price volatility illustrates how narrow targets and short measurement periods can enable potentially excessive windfalls based on factors wildly outside the influence of managers,” Glass Lewis said in June. Like AMC, BlackBerry did not respond to emailed requests for comment.
I’m not suggesting these executives haven’t done a good job. But it’s the sort of thing that sows frustration among investors and prompts pushback at annual shareholder meetings. More than 40% of shareholders who voted expressed displeasure with BlackBerry’s executive pay practices in a non-binding vote at this year’s meeting.
Incentivizing long-term improvement is also undermined if awards pay out too quickly. If executives get too wealthy fast, why stick around? Net settling of share grants — whereby executives receive fewer shares and the company settles taxes on their behalf — can result in a large tax bill for the company, reducing cash flow at just the wrong moment.
Happily, there’s a few simple ways these issues can be avoided.
Make sure you’re rewarding long-term and sustained value improvement, not a brief market spike. BlackBerry’s targets were met based on the average stock price over a 10-day period. DraftKings chose a period of one-month. “A 30-day stock price target does not in our view meet the market best practice of long-term value creation,” Morgan Stanley analysts wrote in June in reference to the DraftKings plan. Lucid’s six-month average price trigger is much better.
Better still is the way Rivian Automotive Inc. structured potentially giant share awards for CEO Robert J. Scaringe. His stock-price linked options can’t be exercised for another six years.(5)
It also seems sensible to include a second metric that rewards operational improvement, as well as a significant rise in the share price. Besides requiring Elon Musk to reach various market capitalization goals, Tesla Inc. set revenue or profitability milestones for him to receive his humungous “moonshot” share options.
Boards should choose targets that are really ambitious. At the time Rawlinson’s compensation was agreed upon in March, Lucid’s implied market capitalization was already around $35 billion, meaning the price “only” had to double from there for Rawlinson to receive the full amount.
And they should avoid adjusting share-price targets just because the old ones don’t appear achievable. This is why some of AMC’s executive share awards vested: with the cinema chain near bankruptcy, the board lowered the share-price hurdles Aron was required to meet, according to this filing.(4) The shares have since exceeded even the levels it once deemed too difficult. A company falling on hard times is exactly the sort of thing that gets the animal spirits of the meme stock crowd going.
Finally, allow the board some discretion. If an award is genuinely the result of some bizarre share price move, or external factors that weren’t the CEO’s doing, consider adjusting the payout.
Ultimately, a high share price should be the result of careful nurturing of the business, not an end in itself. In the meme era, incentivizing bosses to hit even seemingly ambitious stock price targets is a recipe for trouble.
(1) Rawlinson’s 16 million performance-based restricted stock units vest in stages when the following market capitalization targets are reached: $23.5 billion, $35.25 billion, $47 billion, $58.75 billion and $70.5 billion. These targets are based on a volume weighted average price over any rolling six calendar month period. The awards are subject to tax.
(2) The stock price targets were between $17 and $45 according to this filing.
(3) The performance awardunveiled in 2018 consisted of 5 million restricted stock units that become earned in $1 share price increments between $16 and $20, calculated as a 10-day volume-weighted trading average. The awards would expire if not earned before November 2023. The stock rose above $25 in January 2021. It has since declined to around $10.
(4) The details are in Rivian’s IPO prospectus
(5) The thresholds for tranches 5 and 6 of the special performance awards were originally $28 and $32, respectively. These were modified to a 20-day volume weighted average stock price of $4 and $8 with a one-year service condition. The targets were met in January. The shares were due to vest in October.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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