A Tug of War: Moonshot Awards vs. Shareholder Value
February 15, 2023
A Tug of War: Moonshot Awards vs. Shareholder Value
Many companies across multiple sectors granted their CEOs uncharacteristically large equity awards in recent years. Among the most well-known examples is Tesla’s 2018 grant to its CEO Elon Musk. This award’s fair value on its grant date was $2.3 billion, with vesting of 12 tranches contingent upon market capitalization goals coupled with revenue or EBITDA goals.
During Tesla’s tremendous five-year growth trajectory to about $208 per share last month, up from about $22 per share in February 2018, Musk managed to reach his performance targets and unlock 11 of the dozen tranches. Yet the auto maker suffered significant setbacks in the past year due to worsening macroeconomic conditions. Tesla has lost about 60% of its market value to date. Musk is viewed as having experienced the largest equity loss among his CEO peers. He lost an estimated $103 billion in value, in 2022.
While “moonshot” plans typically include challenging performance metrics, the question remains: Do the rewards to chief executives match the value realized by shareholders?
Managements’ discussions disclosed in proxies focused mainly on creating pay for performance, yet investors who held pat on these companies’ upswings and downturns often did not reap such rich rewards.
While Tesla is among the most prominent example because of the mere size of Musk’s grant, there are other instances where management and shareholder interests are more clearly misaligned.
Consider LendingTree. In 2017, its founder and CEO Douglas Ledba was granted a performance stock option award as part of his new employment agreement valued at $57.4MM. The award was based on stock price goals measured over a 30-day trading period. The goals ranged from $312.46 to $459.50, representing 70- to 150-percent increases from the exercise price $183.80.
According to LendingTree’s 2022 proxy, LendingTree’s stock increased 117%, translating into an award for Ledba at 111% of target number of options. While this created value for investors, it didn’t last; LendingTree’s stock price has since plummeted to $21.33 as of December 31, 2022, representing an 88% decline since the award was granted. This award would not have been earned and vested over a longer performance period. Lebda cashed in by temporarily increasing LendingTree’s stock for the right 30-day period, and long-term investors were left with a highly devalued stock.
Oracle also granted sizable equity awards to its executives. The plan is based on seven tranches of operational and market capitalization goals. Oracle announced in its 2022 proxy that it was extending the performance period by three years since only one-seventh of the award had vested.
Many newly public companies also granted sizable equity awards to their CEOs. These types of plans almost exclusively featured stock price goals, which nominally align management and investors. Airbnb gave its founder and CEO Brian Chesky $120MM worth of front-loaded restricted stock that vests based on stock price over a 10-year performance period. These goals range from $125-$485 per share measured over a 60-trading-day period trailing average. Chesky has earned two tranches of the award so far, but Airbnb’s stock price at year-end 2022 was $85.50 representing a -48% decrease from $165, the share price that merited the vesting, and a -49% one-year TSR. While Airbnb’s 60-trading day average seems to represent sustained value, it was not sustained enough for longer-term investors.
GoodRx, a healthcare technology company, also granted its co-founders and co-CEOs a large amount of equity valued at $266.7MM before its IPO with vesting subject to attaining predicated stock price goals during the average 20-day trading period. These goals ranged from $6.07 to $51.28. According to its 2021 proxy, all goals were achieved in the post-IPO period, and the award vested in full. By December 31, 2022, however, its stock price closed at $4.66—hardly evidence that value was achieved in the longer term.
Farient’s Point of View
After a comprehensive review of companies offering moonshot plans, our analysis found that using only stock price goals over a limited period does not necessarily create long-term value and often results in a misalignment between management and investors.
Markets have been volatile heading into the upcoming proxy season. Given larger macro geopolitical and economic uncertainties, it will be worth watching which companies reward their executives with moonshot plans, adjust goals, or extend performance periods on existing plans.
* Since writing this piece, Robinhood’s co-founders forfeited their 2021 pre-IPO grants that were based on stock price goals ranging from $120 to $300 per share. The grants were previously valued at $503MM for Vladimir Tenev and $302MM for Baiju Bhatt. Robinhood’s stock closed at $10.47 on February 8, 2023, the date the cancellation of the award was announced.
By Claire Kamas
Claire Kamas is an analyst with Farient Advisors Data Analytics Group based in Louisville, Kentucky.
About Farient Advisors
Farient Advisors LLC is an independent premier executive compensation, performance, and corporate governance consultancy. Farient provides a full array of services, linking business strategy to compensation through a tailored, analytically rigorous, and collaborative approach. Farient has locations in Los Angeles, New York, Louisville, and Dallas and works with clients globally through its partnership in the Global Governance and Executive Compensation Group (GECN). Farient is a certified diverse company and is recognized by the Women’s Business Enterprise National Council.