CEOs taking above market compensation underperform

CEO Marissa Mayer received $14mm in compensation in 2015.  What's more absurd than her total comp is that $14mm was her pay for performing poorly (the stock fell 34% in 2015); had she hit her targets she would have earned $35mm.  At DAN Fund we believe there is a direct correlation between overcompensation and underperformance and companies like Yahoo are a prime example.  We see it in our portfolio as well: at DAN Fund we have 9 portfolio companies at which the CEOs have annual salaries as low as $35,000 and as high as $280,000, and those companies where the CEOs take lower salaries consistently outperform those were the CEO is overpaid.

 

To find out whether our belief is correct, we dug through the S1’s of 47 well recognized publicly traded tech companies (2 hardware, 45 SaaS) that could be considered startups in the past 15 years.  We looked at the salaries of those CEO’s upon IPO and then looked at the compound annual return of their stock from IPO to May 18, 2016.    Sure enough, the data supports our belief that CEOs who take above market compensation tend to underperform. A link to the data is below.

https://www.dropbox.com/s/6g3wkg3ubuhrt7h/Article%20-%20Salaries%20%26%20Performance.xlsx?dl=0

 

The list below shows the companies in the dataset that have performed well since IPO, which we define as a compound annual return in excess of 8%. 

 

GOOD PERFORMERS   Salary Bonus Options Total   Price Open Price  
Company CEO Comp Comp Comp Comp   at Open Date on 5/18/16 Return
Shopify Tobias Lutke $339,055 $0 $0 $339,055   $17.00 May-15 $26.34 55%
2U Christopher Paucek  $300,000 $450,000 $4,086,606 $4,836,606   $13.00 Mar-14 $26.93 40%
Zendesk Mikkel Svane $200,000 $74,906 $0 $274,906   $13.43 May-14 $23.59 32%
Proofpoint, Inc. Gary Steele $300,000 $127,500 $816,884 $1,244,384   $16.85 Apr-12 $52.43 32%
ServiceNow Frank Slootman $150,000 $116,218 $0 $266,218   $24.60 Jun-12 $70.03 31%
BroadSoft, Inc.  Michael Tessler $276,058 $191,120 $493,176 $960,354   $8.25 Jun-10 $40.35 31%
SalesForce Marc Benioff $1 $0 $0 $1   $4.30 Jun-04 $77.87 28%
Hubspot Brian Halligan $238,183 $1,212 $132,376 $371,771   $30.10 Oct-14 $44.17 27%
Qualys, Inc. Philippe Courtot $300,000 $103,500 $0 $403,500   $12.00 Sep-12 $26.98 25%
SPS Commerce, Inc. Archie Black $276,000 $29,728 $103,406 $409,134   $14.00 Apr-10 $51.88 24%
MindBody Richard Stollmeyer $360,000 $106,484 $699,668 $1,166,152   $11.56 Jun-15 $13.60 19%
Ultimate Softare Scott Scherr $200,000 $0 $318,809 $518,809   $8.50 Jun-98 $191.17 19%
Athenahealth, Inc. Jonathan Bush $298,077 $0 $81,921 $379,998   $30.00 Sep-07 $129.98 18%
LogMeIN, Inc. Michael Simon $265,000 $299,118 $72,686 $636,804   $20.00 Jul-09 $57.34 17%
Instructure Joshua Coates $1 $0 $0 $1   $16.00 Nov-15 $17.16 15%
Cornerstone Adam Miller $310,000 $0 $3,664,591 $3,974,591   $18.00 Mar-11 $36.12 14%
Demandware Thomas Ebling $275,000 $0 $211,680 $486,680   $25.25 Mar-12 $42.46 13%
Medidata Solutions Tarek Sherif $360,000 $448,000 $58,136 $866,136   $18.00 Jun-09 $41.71 13%
Atlassian Scott Farquhar $264,862 $23,041 $0 $287,903   $21.00 Dec-15 $22.12 13%
WorkDay David Duffield $33,280 $1,500 $0 $34,780   $48.69 Oct-12 $72.72 12%
Lifelock Todd Davis $408,462 $0 $239,277 $647,739   $8.38 Oct-12 $11.75 10%
Netsuite Zachary Nelson $300,000 $12,591 $143,000 $455,591   $35.50 Dec-07 $77.70 10%
Splunk Godfrey Sullivan $250,000 $500,000 $0 $750,000   $35.48 Apr-12 $50.21 9%
RealPage, Inc. Stephen Winn $400,000 $250,440 $0 $650,440   $13.00 Aug-10 $20.97 9%
                     
Median   $276,029 $26,385 $77,304 $471,136         19%
Average   $254,332 $113,973 $463,426 $831,731         21%

 

Of the 47 companies, 24 have had annual compound returns in excess of 8%.  The median and average returns of this group are 19% and 21% respectively, which is very strong.  The median and average compensation of the group is $471k and $831k.  This comp includes salary (median of $276k), bonus, and options.  Notice that two of the CEOs in the dataset take salaries of only $1 per year (Marc Benioff and Josh Coates).  Indeed had you invested in Salesforce at the IPO and held, you’d be killing it with a compound annual return of 28% since 2004.     

 

Below is the data of the remaining 23 underperformers. 

 

POOR PERFORMERS   Salary Bonus Options Total   Price Open Price  
Company CEO Comp Comp Comp Comp   at Open Date on 5/18/16 Return
LinkedIn Jeffrey Weiner $250,000 $1,242 $211,055 $462,297   $94.25 May-11 $128.39 6%
Five9, Inc.  Michael Burkland $366,212 $49,462 $1,932,377 $2,348,051   $7.95 Apr-14 $8.85 5%
Marketo Phillip Fernandez $325,000 $308,750 $1,852,900 $2,486,650   $23.10 May-13 $26.81 5%
Textura Patrick Allin $455,000 $698,926 $677,899 $1,831,825   $24.00 Jun-13 $26.00 3%
RingCentral, Inc. Vladimir Schmunis  $325,000 $146,453 $3,166,531 $3,637,984   $17.25 Sep-13 $18.29 2%
LivePerson Inc. Robert Loscascio $108,000 $50,000 $0 $158,000   $8.75 Apr-00 $6.08 -2%
Cvent, Inc.  Rajeev Aggarwal $365,796 $97,020 $803 $463,619   $38.00 Aug-13 $35.59 -2%
Appfolio Brian Donahoo $250,000 $1,763,000 $369,000 $2,382,000   $13.70 Jun-15 $13.34 -3%
Xactly Chris Cabrera $342,000 $124,231 $0 $466,231   $8.70 Jun-15 $8.23 -6%
Benefitfocus, Inc. Shawn Jenkins $510,513 $0 $370,420 $880,933   $42.50 Sep-13 $34.48 -8%
Intralinks J. Andrew Damico $325,000 $227,000 $11,921 $563,921   $13.00 Aug-10 $7.30 -9%
New Relic, Inc. Lewis Cirne $240,000 $127,435 $0 $367,435   $30.16 Dec-14 $25.83 -10%
Veeva Systems Inc. Peter Gassner $225,000 $0 $0 $225,000   $38.00 Oct-13 $27.80 -11%
Jive Software, Inc. Anthony Zingale $255,769 $0 $2,761,632 $3,017,401   $15.12 Dec-11 $3.66 -27%
BazaarVoice Brett Hurt $250,000 $141,092 $0 $391,092   $16.51 Feb-12 $3.42 -31%
Secureworks Michael Cote  $456,924 $3,328,038 $0 $3,784,962   $14.00 Apr-16 $13.58 -34%
MobileIron, Inc. Robert Tinker $270,000 $0 $13,500 $283,500   $10.00 Jun-14 $2.99 -46%
HortonWorks Robert Bearden $166,667 $166,667 $727,292 $1,060,626   $26.38 Dec-14 $10.19 -49%
GoPro Nicholas Woodman $800,000 $1,003,200 $49,591 $1,852,791   $31.34 Jun-14 $8.80 -49%
Marin Software Christopher Lien $275,000 $0 $2,735,708 $3,010,708   $19.00 Mar-13 $2.15 -50%
Box Inc Aaron Levie $150,833 $38,750 $87 $189,670   $23.23 Jun-15 $11.64 -53%
Fitbit James Park $221,179 $80,000 $7,543,446 $7,844,625   $29.68 Jun-15 $14.13 -55%
Castlight Health Giovanni Colella $200,000 $0 $41,661 $241,662   $37.50 Mar-14 $4.17 -63%
                     
Median   $270,000 $97,020 $49,591 $880,933         -10%
Average   $310,169 $363,099 $976,775 $1,650,043         -21%

 

The median and average returns of this group are anemic, at -10% and -21% respectively.  The median and average compensation of the group is $880k and $1.650mm, which are 87% and 98% higher than the median and average compensation of the good performers.  The CEOs of Fitbit (-55% return, comp of $7.8mm), Marin Software (-50% return, comp of $3.0mm), and GoPro (-49% return, comp of $1.8mm) are among the highest paid CEOs yet they have some of the worst performance. 

 

In conclusion, we find a direct correlation between those CEOs that are overpaid and underperformance.  Even in our portfolio, we find that CEOs who take lower salaries are hungrier and need less cash to grow (and hence dilute us less).  

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