Netflix: Heavy Cash Compensation Insulates Execs from Falling Stock Price
Annual meeting June 2, 2022
Netflix CEO Reed Hasting’s total compensation for 2021 was $40,823,725.
I’ve written before about Netflix’s unusual approach to compensation. Each year the compensation committee decides on a dollar amount of compensation and then allows the executives to choose how much to receive in cash and how much to receive in vested stock options. For 2021, CEO Reed Hastings chose to receive the vast majority of his pay in stock option awards, but most other executives received straight cash compensation. Ted Saranados, co-CEO and chief content officer, received $20,000,000 in cash this year, and the same amount last year.
Last year 49.8 percent of shareholders voted against the compensation package, an amount that usually inspires a thorough engagement. The company states that investor support for its pay package has “dipped.” This phrase is more apt to describe a vote that falls in support to the low 90s or 80s percentile.
The company does say that “some shareholders have raised concerns with our program, such as with the overall level of compensation and the ability of executives to choose between cash and stock options” but says other shareholders have “strongly supported” the design. “We continue to strongly believe that our current compensation program’s design is a significant contributor to Netflix’s success, including our ability to attract and retain talent and to align executive and shareholder interests.” I fully accept the first part of that sentence. I would also be attracted to a company that showered me with cash.
Such large cash payments are extremely rare. For many years, section 162m of the tax code limited deductibility for compensation of over $1 million unless performance criteria were attached. The idea of the performance link to the deductibility cap was to discourage excessive pay. Under recent tax reforms this limit was removed. Too many companies, including Netflix, responded to non-deductibility by continuing to overpay its executives and taking the tax hit with a smile. In fact, Matthew Gardner of the Institute on Taxation and Economic Policy’s analysis found that if it weren’t for taxation on compensation Netflix would have paid no tax at all in the past four years. He analyzes the company’s tax avoidance strategies in Netflix Posts a Record $5.3 Billion in Profits and a Federal Tax Rate of Just 1.1 percent. Netflix has gone to great lengths to lower its tax bill, but paying executives less or differently does not even seem to be on the table.
Of course, the context in which shareholders are voting on this package is vastly different than it was even at the end of the last fiscal year. According to press reports, Netflix’s share price is down over 67 percent from the start of the year. If executives were paid in equity they would share in these losses. Those paid multiple-millions in cash last year are likely to feel good about the choices they made. The company is one of only a few of its size that does not have stock ownership guidelines.