YAHOO! Executive Retention Bonuses--The American Way?

In an early June 2006 Form 8K filing with the SEC, the Compensation Committee of the Board of Directors of Yahoo! Inc. (YHOO-$31.56)—among other pay issues—approved long-term retention bonuses with certain executive officers.

For example, as a retention incentive for the next three years, the Committee granted Terry S. Semel, the Company's Chairman and Chief Executive Officer, a stock option to purchase 6 million shares of the Company's common stock at a per share exercise price of $31.59 (the closing trading price of the Company's common stock on the date of the grant). The stock options vest over a three-year period, with 25%, 35% and 40%, respectively, vesting on each anniversary of the grant date as long as Mr. Semel remains CEO of the Company. The stock options have a term of seven years.

Retention packages are designed as “incentives” to retain key executive talent and to ensure the stability of the senior management team for the predictable future. The 10Q Detective is of the opinion that Yahoo!’s good-faith gesture of granting millions of Common Stock options is a needless incentive—akin to the pay or play contracts that Hollywood studios commonly dole out to A-list actors to secure their availaibility for proposed movies in the offing.

The theatrical release of Superman Returns reminds us of an earlier Superman pay or play incentive. Warner Bros.—with no more than a storyboard—spent an estimated $25 million [1997-1998] for the services of Director Tim Burton and to Nicolas Cage (to star) in the tentatively titled Superman sequel, Superman Lives—and not a single frame of film was ever shot [we are not kidding]!

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In 2005, Yahoo! paid Terry Semel, 63, total compensation of approximately $12.5 million. This does not even include the two million options granted to him (at an exercise of $34.75 per share). According to the Company’s Annual Proxy Statement, assuming a conservative 5.0% annual rate of appreciation, this one-year grant could show a realizable value of $43.7 million in 2015. Additionally, Mr. Semel exercised options underlying approximately 7.0 million shares, worth a realized value of $173.6 million! [Ed. note. The value realized represents the difference between the fair market value of the Company's common stock on the day of exercise and the exercise price of the options, and does not necessarily indicate that Semel sold such stock.]

Mr. Semel became CEO in April 2001. [Rhetorical] Did the Compensation Committee have to throw 6.0 million more shares at him as a retention incentive to get him to stay?

As stated in the Proxy Statement by the Compensation Committee: “Mr. Semel's unique skills, experience spanning the Internet and media industries, and repeated past success make him an attractive candidate to competing organizations. In view of his attractiveness to competing organizations, the Compensation Committee believes it has been and remains important to provide Mr. Semel with retention as well as performance equity awards to provide him with substantial incentives to remain with the Company.”

The man already owns 18.4 million shares of Common Stock—1.3% of the Company. Additionally, he owns 17.6 options that he has yet to exercise. And really—where is he going? Maybe down to Brazil to lead the online provider, Universo Online?

The Compensation Committee’s retention bonus philosophy is not exclusive to Yahoo! Inc. Companies as small as ($5.4 million market cap.) defense and private security contractor, DynCorp International (DCP-$10.50) and as big as ($7.08 billion) tobacco company, UST Inc. (UST-$43.89), have issued retention bonuses for key executives in the last year.

A key provision of the Sarbanes-Oxley Act of 2002 specifically prohibits company loans to executives. Our friend, Michelle Leder, writer of the daily blog, footnoted.org, wrote in an article in Slate (“Outfoxing SOX,” January 24, 2005), how companies (and their executives) are devising clever new methods to circumvent this provision [Section 402] and legally allow the firms to direct money to its top executives. Three of the more-popular strategies that Michelle identified:

• Special signing bonus: upfront money for joining a company.
• Retention bonus: money upon renewal of employment contracts.
• Death retention bonus: money payable to executive’s beneficiaries upon proof of death of the executive.

Just think of the competitive edge many companies could attain if they invested more incubation time on R&D—and less on constantly trying to outfox the SEC?

“Truth, Justice, and the American Way!” The three cardinal words wrapped up in Superman’s red cape. Sadly, when it comes to executive compensation—often times truth and justice are laid siege by greed: Is it not the American Way?”