- Snap recently disclosed that it paid CEO Evan Spiegel $638 million last year — mostly in the form of a gigantic stock award.
- The award was worth more than any other since at least 2011, bigger even than the jumbo award Apple gave Tim Cook when he took over from Steve Jobs as CEO.
- Snap says it gave him the award for leading it to an IPO, but its rationale for the award itself and its huge size doesn't make much sense.
- The award points not only to problems with Snap's governance, but to the broader issue of executive compensation.
Executive compensation has been out of whack for years, but occasionally a giant payday illustrates just how broken the system is.
Snap provided just such an eye-opener last week when it disclosed how much it paid CEO Evan Spiegel in 2017. His tally: a whopping $638 million.
That amount would have been ludicrous no matter who received it or which company paid it. But if it were Tim Cook or Jamie Dimon or Warren Buffett making north of $600 million, someone sympathetic to them could try to make a case for it. They are, after all, the heads of some of the most profitable companies on earth.
But Spiegel is no Cook and Snap is no Apple. And there's no case to be made that he deserved such outsized compensation — quite the contrary, in fact.
Let's put Spiegel's compensation into perspective.
His salary was equivalent to more than 77% of Snap's full-year revenue last year. Indeed, he made more than the company posted in sales in its first three quarters of 2017 combined. His compensation was so large, in fact, it can be compared to Snap's total value — the company paid him a salary that was equal to about 3% of its total market capitalization.
Here's another way to look at it. Nearly all of Spiegel's compensation came in the form of a one-time stock award. That award, which Snap valued at $637 million, was worth more than any other on record dating back to 2011, according to Equilar, a data research firm. In fact, it was worth 69% more when it was granted than the behemoth stock award Apple gave Cook in 2011 when he succeeded Steve Jobs as its CEO.
Snap says Spiegel needed some motivation
A Snap representative did not return an email seeking further clarification or explanation of Spiegel's stock award. But in the documents the company filed to go public, and again in the annual report it released last week, Snap said it used the award as a motivational tool.
It originally promised the award to Spiegel in 2015 "to motivate him to continue growing our business and improving our financial results so that we could undertake an initial public offering."
The company gave him the grant as a reward for its successful IPO.
But you have to wonder why Snap's board thought Spiegel needed such motivation. As the founder of the company, Spiegel already owned a sizeable chunk of Snap. (Immediately prior to Snap's IPO, he owned about 22% of the company's outstanding shares.) He already stood to become a very rich man — and cash in some of his stake — if and when the company went public. It's unclear why he needed another 3% stake in the company to drive it toward that goal — or what kind of extra incentive that provided.
Are we really expected to believe that if Snap hadn't promised Spiegel that extra 3% stake, he would have avoided leading it to an IPO? C'mon.
It was clear when Snap promised the grant it would be hugely valuable
It's not like Snap's board didn't have a sense of just how valuable that grant would be. At the time it promised him the grant, Snap was raising money in a venture round that ended up valuing the company at $17.8 billion. Even if the company went public at the same valuation, the grant would have been worth around $534 million — which even then would have been one of the largest stock grants ever.
But let's say he did — for whatever reason — need an extra inducement beyond the stake in the company he already owned. Was it really necessary to promise him such a huge grant? Would he not have been just as motivated to pursue an IPO if he had been promised stock that was worth a tenth or even a hundredth as much as he got?
Can we really be expected to believe that he wouldn't have steered Snap to an IPO if his promised reward only would have been worth $63 million or $6 million?
And not to discount the importance of a public offering, but an IPO isn't the end of the line for most companies. Indeed, for most of the investing public, an IPO is the beginning of their relationship with the company, not the end. If Spiegel was so important to Snap that the board felt it necessary to give him a grant that was worth hundreds of millions of dollars, shouldn't it have done more to ensure that he'd stick around for the long term — or continue to focus on the company's performance after the IPO?
Snap's board didn't seem to think so. Spiegel doesn't have a long-term contract with the company. And the stock award has no performance targets.
The grant does get parceled out to Spiegel over a period of three years. But by December, Snap had already handed out to him nearly a tenth of the grant — stock that's worth about $53 million now. Those shares are fully vested; Spiegel can sell them at any time — and he's already started to do so. And Snap doesn't have to hit any future performance targets for him to get them. He's entitled to them presumably as long as he stays at the company and possibly even if he leaves.
Snap is still a work in progress
Look, there's no doubt that Spiegel fulfilled the terms of his agreement to get the grant. Snap's revenue soared between 2015 and last year, and he led the company to a successful IPO.
But Snap is not exactly a roaring success as a company. In its seven-year history, the firm has never posted a profit or even generated any cash from its operations. Meanwhile, in its short life as a public company, it's repeatedly struggled to meet Wall Street's expectations. Its attempt to diversify by making eyeglasses that doubled as cameras was a pricey disaster. And its core Snapchat app is under threat from Facebook's Instagram, which not only seems to copy all its most popular features, it tends to garner bigger audiences for them.
In other words, Snap is still very much a work in progress, but the company paid Spiegel as if it had conquered the world.
Spiegel's payday points to a broken compensation system
Maybe we shouldn't be surprised at Spiegel's payday. After all, the way Snap ownership is structured, Spiegel's shares give him outsize control over the company. Between him and his cofounder, Spiegel can pretty much do as he pleases at the company and require the board to pay him whatever he wants with or without as many restrictions as he pleases.
It wasn't supposed to be this way. For the last 25 years, public policy makers, corporate governance experts, and academics have been trying to rein in executive compensation and ensure that corporate managers' pay is directly tied to the performance of their companies.
But as Spiegel's giant payday makes clear, executive compensation just keeps going up, to ever more absurd levels. And the justifications for it get less convincing by the day.
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