US tech giants set themselves apart with unusual pay plans

Washington

AMAZON.COM, Alphabet and Facebook have upended the establishments in retailing, advertising and media - so it may not come as a surprise that their pay plans are unusual too.

The three set themselves apart from other Standard & Poor's (S&P) 500 Index companies by paying bosses almost exclusively in stock grants that are free from any links to performance goals. The vast majority of the biggest US companies tie most of their top executives' pay to targets disclosed in regulatory filings, according to the Bloomberg Pay Index.

Paying in stock rather than cash helps boards align management rewards with performance and tying those grants to specific financial or operational milestones can reinforce that approach.

Yet for businesses in hot industries like tech, boards may prefer plans that don't reveal company targets and that help retain highly sought-after executives by guaranteeing their potential payouts.

"A pay programme that isn't strictly bound to a formula gives the board more latitude to adjust to situations in real time," said Steven Hall Jr, a consultant at executive compensation advisory firm Steven Hall & Partners. "And how much detail do you really want to disclose in proxy filings and reveal to competitors?"

Amazon avoids linking compensation to performance criteria because doing so "could cause employees to focus solely on short-term returns at the expense of long-term growth and innovation", according to a filing. The company typically grants executives biennial stock awards that vest over six years.

Google parent Alphabet also grants equity every other year, a strategy it has said "encourages executives to take a long-term view". The payout isn't contingent on performance objectives and typically happens over several years.

Executives have previously been eligible for discretionary annual bonuses based on individual and company achievements. Those were eliminated this year for most participants, a filing shows.

In an industry where ideas are plentiful but talent is scarce, companies are racing to recruit engineers and executives able to upend existing business models with promises of equity-laden pay packages. That's helped drive compensation at tech's top echelon to levels rarely seen since the financial services industry before the 2008 crash. Examples include the US$199 million grant awarded to Sundar Pichai after he was selected to run Google.

Big run-ups in share prices coupled with founders holding controlling stakes might have given some businesses leeway to use more liberal pay practices without upsetting investors, said David Larcker, a professor of accounting at Stanford Graduate School of Business. "Talent makes or breaks a company - that's true everywhere but it's especially true here," Prof Larcker said about the tech industry. "If the view is: 'This person is going to put us over the top and create multiples of what we're going to pay him,' then they're going to tailor that package to get that person."

Facebook and Alphabet have latitude in pay decisions because their founders hold controlling stakes in the businesses, ensuring that they always pass advisory say-on-pay elections and secure approval to refill the supply of shares used to pay employees. Amazon founder Jeff Bezos owns a 17 per cent stake in the online retailer. All three received more than 90 per cent support in their most recent advisory shareholder votes on pay programmes.

Shares awarded to Facebook founder Mark Zuckerberg's four top lieutenants in 2015 made up more than 80 per cent of their total pay, compared with an average of 60 per cent for S&P 500 CEOs, according to data compiled by Bloomberg. They will be fully vested by 2021 as long as the four remain employed by the company, a filing shows.

The executives are also eligible for annual bonuses based on goals including user-base growth and progress toward long-term investments. Facebook said it anticipates to increase the share of cash compensation to "move closer to market" relative to its peers, without specifying if it'll be tied to performance.

Vesting periods of at least four years are necessary for companies that rely exclusively on time-based stock awards to "gear individuals toward taking a longer-term view", explained Aalap Shah, managing director at executive pay firm Pearl Meyer. An absence of metrics from pay plans hardly means that executives don't have goals they must achieve to get paid, he added. WP