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Netflix Managers Get Paid Regardless of Performance
Posted by: GMI Ratings (IP Logged)
Date: October 11, 2012 10:13AM

Netflix Inc. stock prices recently surged, only to plunge once again. If the Los Gatos, Calif., video subscription company can’t stage a consistent comeback after months of travail, shareholders will find it challenging to make its senior managers accountable.

Netflix shares soared nearly 10.5% to close at $73.52 per share on Oct. 8, but have sunk since to around $65.70 a piece early Thursday. The momentary uptick was a marked departure from the stock’s nearly 40% slide during the past year. As we discussed here, CEO Reed Hastings and his team have experienced problems in recent months that range from losing money in the first quarter to backtracking on a plan last year to separate Netflix’s DVD-by-mail service from its streaming service.

Analysts are sparring over what happens next. For example, Morgan Stanley upgraded Netflix and slapped an $85 price target on the stock, the Wall Street Journal reported on Oct. 8. Analyst Scott Devitt reportedly explained that the ecommerce giant Amazon.com (AMZN) isn’t as focused on developing original content to the degree originally thought, potentially diminishing a competitive threat. Then Bank of America downgraded Netflix’s stock while maintaining a $72 per share target, noting more concern about the company’s domestic streaming business and its international streaming profitability, the WSJ reported Oct. 9.

While investors wonder about the future, Hastings’ salary doesn’t depend on Netflix’s business performance. Unlike most publicly traded companies, which often link a portion of executive compensation to specified targets such as the amount of revenue or earnings achieved, Netflix has taken the unusual move of granting its named executive officers only fully vested stock options. In 2011 Hastings received a $500,000 salary and stock option awards that the company estimates will be worth around $8.79 million whenever he decides to exercise them. While his monthly stock option allowance has decreased this year by 50% compared to what it had been in 2011, this won’t likely dent his fortune. In addition to the above-mentioned salary in 2011, Hastings realized nearly $43 million that year by exercising 190,500 of stock options earned in times past.

Not only is Hastings’ pay not linked to his performance, but his company’s policies limit shareholder say on the boards’ decision making. For example, many companies allow their investors to vote and elect all their directors each year, but at Netflix three groups of directors are elected every three years so that investors vote only on a portion of the board every year. When a shareholder protested in recent months that a change to the system would enable Netflix investors to have more input on the directors’ performance, the board responded that its existing system strengthens the independence of non-employee directors against the “often short-term focus of special interests.” It remains unclear whether the board is referring to its minority investors as special interests.

Given that Netflix’s managers don’t have any checks and balances offsetting their powers, they seem more likely to deliver unpredictable results. Indeed, an analysis of Netflix’s financial data results in an Accounting and Governance Risk (AGR ®) score of 3, indicating higher accounting and governance risk than 97% of companies.


Stocks Discussed: NFLX, AMZN,
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