Transcript: Big Tech Compensation: Going Deep with MBI
Transcript: Big Tech Compensation: Going Deep with MBI
Transcript of Podcast #20
This is the transcript of this podcast:
Liberty:
Hello, my friend. How are you today?
MBI:
I'm good. It's really good to be back for the fourth time, I guess.
Liberty:
You're taking the lead now, I think
MBI:
I'm determined to keep the lead.
Liberty:
I was thinking it's important to experiment in life, always try new things, so I wanted to try a new format, something a bit shorter, a bit snappier. Because I'm not original, I just figured I'd copy Dithering, but I don't think we can keep it to 15 minutes. Can we do that?
MBI:
I'm not optimistic that I'll be able to only speak for 15 minutes, I don't trust myself to speak only for 15 minutes, so I'm guessing it will definitely cross 30 minutes. We'll see how it goes.
Liberty:
It doesn't matter, as long as we're having fun, that's the important thing. The topic for today, you recently posted about Big Tech compensation and that's an interesting topic, because I think everybody knows some of the headlines, but few people dig into the actual proxies and look at the stuff which you did, so that was super interesting. I'd love it if we could go through what you found and if you had any more new thoughts, I know you got feedback on it, so any new things since you published would be great.
MBI:
First of all, you mentioned Big Tech and I also, when I wrote that piece on incentive and compensation structure at Big Tech, some people mentioned like, "Hey, why is Tesla not included there, is it not tech enough for you?" First of all, well, even for Meta, it's 300, 350 billion EV now, so technically they're probably not even part of the Big Tech anymore, because the rest of them are at least $800 billion enterprise value and Apple and Microsoft are more than probably 1.5 trillion enterprise value. The reason I haven't really included Tesla is because I am yet to follow Tesla closely, so I just never really followed the company closely. When I do, I'm pretty sure I'll also start following their compensation structure and proxies and all that.
I'll just confine this conversation to Apple, Microsoft, Meta, Amazon, and Google or Alphabet, because these are the companies I just have been following for a while. Well, not so much for Microsoft, I haven't paid as much attention to Microsoft and Apple as I did for Amazon, Google, and Meta. Microsoft and Apple are in a adjacent area, playing in similar spaces compared to these other three companies, so I end up following bits and pieces of these companies anyway. Tesla is sufficiently different, at least so far, so I haven't felt drawn into it yet, but maybe I will at some point going forward.
Anyway, so I wrote that piece and I asked my couple of my friends, "Hey, what do you think about this proxy?" I was just looking at Microsoft's incentive structure, I had a couple of questions. My friends gave me a couple of talks, I dug into few other companies processes, as well, and I'm like, "You know what? Let me just write a thread." There is no better way to receive unfiltered feedback other than writing a thread on Twitter, people just tell you what they think. Also, because I posted it also on my website, many of my subscribers also responded and shared their thoughts. It'll be cool to build onto to what I have already written, so I'll discuss briefly and then share some additional thoughts.
Again, when I wrote that piece, I sorted it as some sort of ranking of who has the best incentive structure, who has the worst incentive structure? Just to level set, I'm personally not beholden to the ranking structure. I just basically looked at these five, six companies' incentive structure, spent half a day. I had two or three criteria in terms of ranking, so I tried to fit these five, six companies into that methodology, but obviously, there are lots more variables and there are a lot more nuances to it, so I'm personally not beholden to that ranking methodology or structure.
Frankly speaking, after further introspection, after discussing with people and receiving feedback, I think I personally don't even agree with my own ranking, at least on one particular occasion. We can get into that, we can talk about that. There are pros and cons, I think, for all of these companies' incentive structure, so it's probably better to get into that, pros and cons, instead of me defending, "Oh no, no, no Apple has the best incentive structure and Meta is the worst, Amazon is third or fourth," there's no point in doing that. There are pros and cons in every company's incentive structure, so it's probably better to just get into those details.
Liberty:
Let's roll. Let's start from the top, you covered Apple first. What did you think? I was surprised, because I've been following the company for a while, more on the tech side and on the product side, I haven't followed very, very closely all the financials. I used to own Apple some years ago, I don't anymore and so I haven't followed since then. But it was interesting to see how Tim Cook got something and then he decided it wasn't restrictive enough for himself, so that was interesting. What do you think of Apple?
MBI:
I guess, again, another disclaimer I probably should give, I personally own Amazon, Meta, and Google or Alphabet shares and also some options, but those are long-dated options, it's not like they're expiring next day or next week. I need to give that disclaimer first before I discuss. I don't personally own Apple or Microsoft. When I looked into these proxies, my impression is that Apple probably had the best incentive structure. It is debatable whether they have the best incentive structure right now, but they probably had the best in the last 10 years. What they did when Tim Cook became CEO after Steve Jobs, so they gave him a huge time-based restricted stock units, or time-based RSU, which he would receive in two installments after 5 years and after 10 years. Those are sufficiently long-dated RSUs, but there was no performance condition attached to it, so he would receive those shares as long as he just remains the CEO.
Liberty:
Just sticking around.
MBI:
Just sticking around. It doesn't matter whether Apple is $5 a share or $300 a share, or let's talk on market cap, whether it's a $10 million company or a $2 trillion company, there would be no difference in terms of how many shares he would get. Obviously, the value of those shares would be massively different, so he has some alignment there, but it's just time-based RSUs. In 2013, he requested the Compensation Committee to make some changes in his incentive structure. He basically said that hey, after 10 years, if... It is more complicated than that, let me just keep it simple. Let's say if Apple is the bottom third of S&P 500 companies, he would receive basically zero RSUs, nothing, zero, and if it's top third, he would receive 100% of RSU that he was granted, and if it's in the middle, he would get 50%. The thing is to note here is he basically inserted clauses that would jeopardize his compensation, he have no further upside.
Liberty:
He didn't get anything. He didn't say, "Oh, I want 200% of my RSUs if I do better," it could only get worse.
MBI:
Exactly. There is no way things could have been better for him compared to what compensation plan he already had in 2011. I wasn't around in the US in 2013, but I know for a fact that people were not really super bullish about Apple back in those days. My guess is, you were probably around at that time, so in 2011, 2013 period, now-
Liberty:
It's around the time when everybody was saying that Samsung was innovating more, was going to kill them, where they didn't have the big phones or maybe they just started getting them. I'm not sure when the iPhone 6+ came out, but it wasn't the most positive time for Apple in the market, from my memory.
MBI:
I know the stock was trading at was high single-digit P/Es. If you think, just from valuation perspective, the multiples who are telling you that probably, the street was expecting that Apple would be terminally ill around this time. Obviously, now things are reversed in the complete opposite direction. Now, this is the best business in modern world, there is no beer case and all that, so-
Liberty:
Don't look at China too much, right?
MBI:
Right. He had no upside compared to the compensation he already had, he just inserted clauses that could only jeopardize his compensation structure. I think that was a very gutsy call by Tim Cook. We all know what happened, it became multibaggers, despite starting as one of the largest companies in the world at that time, it became the largest company in the world and it remains one. I love that gutsy move by Tim Cook. The reason I said the last 10 years were probably much better than the one they have right now is because now, they don't have a 10-year RSU grant. They gave Tim Cook a three-year grant and again, the structure is if Apple is, from 2021 to 2023, if they become top third, they will receive 200%.
Now, they have some upside. Above 85th percentile of the S&P 500 companies after these three years from, I think, on October 1st, 2023, if Apple is above 85th percentile of S&P 500 companies, then the named executive officers, or NEOs in short, and Tim Cook, of course, they will receive 200% of their target RSU grant, so now, they have more upside. They do have some downside, as well. If Apple is below 25th percentile, Tim Cook and the named executive officers will receive zero percentile, so zero is a possibility. In this case, I think I understand why they are not giving him a 10-year grant, because he's not going to be around for 10 years.
Liberty:
It feels like he's looking as his retirement coming and he's not ready to commit for that long, but in this world with big company CEOs, non-founders, not sticking around for very long, Tim Cook's tenure has been pretty long.
MBI:
Think about it, when people ask, "Who has much more influence on Apple's eventual trajectory, was it Jobs or was it Tim Cook?" The fact that people even ask this question is such a big, big testament to Tim Cook's success, what he made Apple to be. Obviously, like I said, Apple was a very successful company even when he started, but to make it a complete juggernaut and it looks like he'll probably retire keeping the company as a behemoth is just a huge, huge, huge testament to his management capacity and prowess. I am pretty sure he is going to be one of the executives that people will want to remember in terms of how much he added value to the company.
Liberty:
I don't want to turn this into an Apple podcast, but I feel like the two main things as COO under Steve Jobs is personal excellence, the supply chain and turning Apple into a very, very profitable company, because they were a great design company and everything, but Tim Cook made them profitable and made them scalable, that was the first big thing he did. And then after that, it was mostly as a steward that is not screwing up the DNA that Steve Jobs put into the company.
I feel a lot of other executives would have had too much ego and would have tried to put their stamp on Apple and change it and go in different direction, and they likely would have screwed it up, while Tim Cook was a steward of the culture and how Apple was under Steve Jobs. I've heard from people who worked at the company that one of the most impressive things about Tim Cook is how much he gets the culture and tries to preserve it. He knows he's not the best designer, the best technologist, the best this and that, but he's been a good steward of the company. Anyway, that's a tangent.
MBI:
Just to that point, I think one point I do want to add is that it's very hard to see the future, so who knows how... I just say probably a couple of minutes ago that people who fondly remember him, and then I just remembered about Jack Welch and GE and all that stuff. I don't know, maybe it's possible 10 years down the line, people will say, "Hey, Tim Cook made Apple so reliant on China and that's really what made things unravel at Apple." Who knows? The future is just incredibly unpredictable, we don't know how the future will think of Tim Cook, but so far, so good. Let's not make it Apple's podcast, so I'll just mention some-
Liberty:
That's an excellent point, though, excellent point. It's so true that in real time, it's very hard to judge how well someone is doing without some distance, so great point.
MBI:
Just one more point, I do have some criticism after digging more, I was trying to compare even more, in more finer details, and I thought I do have some criticism for Apple's incentive structure. Right now, Tim Cook gets $3 million base salary, just like his base compensation annually, and the rest of the named executive officers, sorry, NEOs, they get roughly a million dollar base salary. The thing that I don't like, I need to be clear why I don't like it as I going to go through other companies' incentive structure, Apple does pay $10 million cash bonus to Tim Cook and $3 to $4 million to other named executive officers.
Obviously, they also have that three-year performance based in the stock rewards, which obviously, it depends on the value of the stock.
Liberty:
What's the conditions on the cash bonus? What does he need to do to get the bonus?
MBI:
I have to double check. I think they do have some annual requirements in the metrics that they have to meet.
Liberty:
But it's very short term, right?
MBI:
Yeah, very short term. Again, let's not dwell too much. As I go down the list, it'll be clear more why I'm not a big fan of this $10 million cash bonus each year. Let's go to Google or Alphabet. Sundar Pichai is the current CEO of Alphabet. He becomes CEO of Google in, I think, 2015 and then he becomes CEO of Alphabet and the whole company in 2019, so he's been around for roughly three to four years as a CEO of the whole company. He receives $2 million cash base annually, dollar, and named executive officers get $650,000 in base cash every year. Google does not pay any annual cash or stock bonus, zero, it's just base cash that they receive every year. They do have a lot stock awards that gets paid on a three-year basis.
What I like about that is they have a relative TSR component, TSR is the total shareholder return. Apple also has that, like I said, if they're a 85th percentile or above, they get paid 200% of target RSUs. Google has a similar structure, so for Google, they don't have S&P 500 as a benchmark like Apple, they have S&P 100 as a benchmark. If Google is above 75th percentile, they get 200% of the target RSUs, if they're at 25 percentile, they get 50% of the target RSUs. It's a normal interpolation of, let's say, if they're somewhere between zero to 25th, it's just linear math you'll have to solve to figure out-
Liberty:
You'll find the point between them.
MBI:
Yeah, yeah, yeah. One thing I really loved about Apple's incentive structure, that zero is a possible outcome. As a shareholder, I love the fact that zero is a very possible outcome for Apple, let's say, if they are below, I think what they mentioned, I think 25th or something like that.
Liberty:
Yep, I think so.
MBI:
If they below 25th percentile, they get zero. It's harder for Google, obviously, if they're the worst company in the S&P 100, theoretically, they can be zero, but it's unlikely.
Liberty:
Yeah. It would be quite interesting to see what would cause that.
MBI:
I would personally prefer it to if they are below 25th percentile, just make it zero, instead of this linear interpolation. Anyways, it's not super bad. If it's close to zero percentile, or it doesn't have to be zero, even if it's 5 or 10, they obviously will receive a lot less than if it's top 75th percentile or 80th percentile. The one thing I would say I was surprised a bit why Sundar Pichai was not granted 10-year RSUs. On that point, I should just mention probably, I'm slightly disappointed that all these companies grant RSUs and not options. In Apple's incentive structure, you can get $zero dollar, but options is just a much more efficient way to make sure that zeros are potential outcomes, very real outcomes. RSUs are like if you get a million shares and your stock is down 50% over five-year period, you are still getting a pretty good amount.
Liberty:
It's almost all upside. There's just only the magnitude of the upside, you don't have much downside there. I don't want to be the Constellation fanboy here, but when Constellation executives have to buy in the open market some shares with part of their compensation, they're really shareholders like anyone else, they bought it with real money, while a lot of these executives, it's like, well, you're just getting all these shares for free and they're worth a bit less now, but it's going to probably rebound or something. I don't know, it feels very generous. Even all the TSR stuff with no ROIC, with no organic growth, with no other metrics, it feels a bit generous to me.
MBI:
I will probably push back a little on the Constellation argument, because I think it's not significantly different. You can say philosophically, maybe there is some difference, but I think pragmatically, there may not be much of a difference between Constellation's policy and, let's say, some of these Big Tech companies' policy, and let me explain why that might be the case. For example, for that you have to first start the discussion what is the market value for, let's assume, the Pichai skill set. If it's $100 million, let's say, I'm just throwing numbers here.,If it's $100 million, it almost doesn't matter whether you give him the RSUs or you just give him cash and then ask Sundar Pichai to go and buy stocks from the market. It's essentially the same thing, but maybe philosophically, I can see argument-
Liberty:
Maybe it feels different or maybe it's about the dilution for Sheryl, but I get what you mean. I get that these companies are so large that if Tim Cook makes a decision that changes the trajectory by 100 billion free cash flow over five years, whatever you pay him is going to be a tiny, little drop in the bucket compared to that-
MBI:
Even I would probably push back on the dilution argument, as well. It doesn't matter, it's $100 million that you are deducting it from your P&L directly-
Liberty:
That's a good point.
MBI:
Oh, sorry. If you are paying in cash, obviously, your P&L drops, your cash flow drops, but if you're pay in stock, yes, your P&L still drops, but your free cash flow doesn't drop as much, because you are not really paying them in cash, you are paying them in equity or stock. Again, it's the same thing, we are doing the exact same thing in just different ways and manners, but practical, there is not much of a difference, but philosophically, maybe people are so beholden to, oh, free cash flow is in everything. If companies are incentivized to prop up their free cash flow, then yes, there are incentives to pay in stock instead of cash, but those are finer details.
Liberty:
It depends where the stock is trading. If you shoe a bunch of shares at a very low multiple, it may be a bit different than very high in this. But I totally get what you mean, people split air with that stuff a little too much.
MBI:
To go back to my slight surprise, and perhaps disappointment, Sundar Pichai, when he became CEO three, four years ago, he's right now, 50 years old. He's pretty young, 50, so when he became CEO of Alphabet, he was, what, 47, maybe? Andy Jassy is 55 years old, Satya Nadella is 55 years old. Andy Jassy, and I'll explain later, he got 10-year RSU grant. I think at 47, I could totally see why it would make more sense to give Sundar Pichai a 10-year grant instead of three-year grant. Why does it matter? Because 10-year is longer term, we want him to think long term, make sure that Google's business is in good hands, in good shape. If he starts caring too much about relative TSR in a three-year period, there may be some things that he may do differently, which may not be good for Google in the long term.
To counterargument that, Alphabet still has their founders in board, so maybe they understand these things. They can counteract in a composition structure incentives act as a deterrence for Sundar Pichai to go on about certain things swiftly. We are talking about ChatGPT and OpenAI and how that may affect Google's search business. It's possible one could say, "Hey, Sundar cares about his three-year tier relative TSR and if he just ramps up cost and ends up affecting search business's margin, that will hurt the stock and he doesn't want that." I'm guessing Larry and Sergey are smart enough to understand that it's much more important to protect the business in the long term and not care a lot about the relative TSR in a random three-year period. It would be a lot better, we wouldn't even get into this discussion if they just gave him 10-year grant and not this relative TSR.
As a minority shareholder, I love relative TSR. One of the concerns, I think, if you are investing in some of these Big Tech companies, these companies are so large and the founders or the top executives are so wealthy, it may just not matter to them. If Amazon remains where it is today, if it remains one [inaudible 00:23:05] market company, Jeff Bezos will still probably be one of the wealthiest people in the world, Amazon will still be one of the largest company in the world. Minority shareholders will probably not be happy with just $1 trillion in enterprise value or market cap 10 years down the line, but relative TSR makes sure that executives and top management does care about these things, they have to be better. As a minority shareholder, I do like relative TSR.
We can talk about whether three-year is appropriate, probably not, maybe 5, 10 years is probably more appropriate, but even on a 10-year period basis, I would rather have that relative TSR thing embedded, instead of being just completely open-ended. Like I said, I would prefer it to be options and RSUs, but it feels like almost nobody gives options these days. I know companies do, but not the norm anymore in the tech world. One other general comment that I would include here is when I wrote that thread, some people mentioned, "Oh, it's so easy, it's not really impressive to be in the top 85th percentile or 75th percentile for these companies, they can just do that." I'm like, "Seriously, it's so easy? Why don't you go ahead and pick stocks that will be in the top 15th percentile five years down the line?"
These CEOs have one stock portfolio, they picked one stock and they have to make sure to get paid, basically, at least for Google and Apple, that they have to be at least 75th percentile or 85th percentile of S&P 500 or 100 companies universe. There are a lot of portfolio managers out there in the world, they can pick any stocks they want. They can go long, they can go short. We all know how hard it is to beat the market, to beat the index. To give you a job, to give you a task that hey, your job is to be in the top 85th percentile or 75th percentile of S&P 100 or S&P 500 companies, that is pretty hard. That's not easy at all.
Liberty:
These companies are so large that they're actually a large part of the index that they're trying to beat, especially the S&P 100. Well, how much of that is Google, how much of that is Apple?
MBI:
Exactly. Basically, these companies will have to probably beat each other and that's what's probably going on in the recent years. If you don't have any comment, I can just go to Microsoft.
Liberty:
Let's do Microsoft.
MBI:
For Microsoft's case, Satya Nadella receives 2.5 million cash as base salary, other named executive officers receive roughly a million. Even for Microsoft, like Apple, Satya receives $10 million cash bonus. They mentioned it as non-equity incentive plan, which I am guessing means cash, but who knows what's included there? They mention non-equity incentive plan includes cash incentive, so maybe there are some other stuff in there, as well, so it's not just $10 million cash, it could be some other stuff there, as well. $10 million for Satya annually, maybe cash bonus, 3 to 4 million for other named executive officers. Microsoft also, for their long term stock hours, they look at three-year performance on a TSR basis, relative TSR. Again, that's true for, obviously, Google and Apple, as well, they talk about relative TSR, but for Microsoft, it's just a modifier. They look at annually, there are some operating metrics to determine whether these executives have met those criteria to receive these long-term stock awards.
It's very interesting what sort of metrics they look at, and I'll mention what I like about this metrics, what I don't like about this metrics. If you look at the long-term equity, so there are two, they have annual cash incentive plan, which look into basically 70% of their annual cash incentive depends on financial metrics, so revenue is 35%, operating income is 35%, and 30% of their annual cash incentive depends on operational metrics, product and strategy, 10%, customers and stakeholders, 10%, culture, diversity, and sustainability, 10%. That's annual cash incentives that I mentioned, about$10 million for Satya and 3, 4 million for named executive officers. For long-term equity, right now, the 100% is basically based on these following metrics, Microsoft Cloud revenue, 30%, Microsoft Cloud subscribers growth, 20%, teams monthly active usage growth, 20%, Xbox Game Pass subscribers growth, 10%, Windows OEM revenue growth, 10%, LinkedIn sessions, 10%.
Liberty:
That's a strange one.
MBI:
Yeah, that's a strange one. But let me first talk about what I don't like and then I'll mention what I do like about this metric. What I don't like is it's all based on revenue, subscribers growth, and not much focus on operating income or profitability or maybe ROIC, anything like that. That the problem is, like I said, I don't follow Microsoft religiously, so take my comments with a grain of salt, all these Cloud deals they're doing with OpenAI, with LSC recently, if you look at their incentive structure, it kind of makes sense why they would be inclined to get more revenue, because their incentive is structured like that. But are those really good deals? Are those really good deals for shareholders, from a profitability or cap allocation perspective? We don't know. They haven't really discussed much on what exactly the deal entails with OpenAI.
There are some rumors and speculations, but they haven't really discussed from their own. Even if those deals are a disaster down the line, I don't see how the incentive structure demotivate them to pursue such [inaudible 00:29:09] destructive deals. Even the Activision Blizzard acquisition, I don't know, maybe it's a good acquisition. He's a good CEO, I'm not saying he's a bad CEO, it's a consensus he's a great CEO and I haven't done any deep work to have any sort of non-consensus view here. It's just something that stood out to me when I look at this composition structure. Let me just probably flip and say what I do like about this.
When I looked at several processes, not just Big Tech, and I looked at other tech companies' and even non-tech companies' proxies, one thing that I notice again and again and again is I feel like after looking at them, sometimes they mention later what was the target and what was the threshold, what was the 200% target, what was the 100% target, what was the 50% target? Obviously, they don't mention it on a prospective basis, they only mention it on a retrospective basis, so you can see what was it before the actual thing you have? Very often, I feel like, "Oh, these were easy targets, it wasn't challenging." If I look at what was the expectations for some of these companies and those expectations were actually, if they could beat the analyst's expectations, they would get 200% RSU target. I was like, "That's playing on the easy mode. These boards are not really pushing these companies harder to get those 200%." 200% RSUs target, that should be something that you have done something incredible for the company and not something you would do it anyway or those are easier to meet targets.
For Microsoft, I would say when I looked at they disclosed their targets, I thought those targets were challenging, and they didn't meet all those targets, which is a great indication for me. I like the fact when management doesn't meet those targets, that shows to me that those were challenging targets. It's not like, "Oh, all 200%, great, you all did great." That's really suspect to me when I see something like that. But for Microsoft, if you look at they do disclose earlier annual targets and what they actually ended up achieving, there is wide variability, which is a good sign, which means the board does a good job in setting those targets.
Liberty:
Looking at this, I think I found Nadella's secret plan, check this out. He is going to get ChatGPT to open up a bunch of LinkedIn sessions and just flood LinkedIn with content, that's how he gets there. Man, that must be the secret plan.
MBI:
Yeah, it must be it.
Liberty:
No, but kidding aside, I totally agree how so many of these targets are... I don't remember if it was Buffett or maybe Michael Mauboussin or someone was talking about how if you're a CEO for 10 years, just redeploying the company's earnings, that's a tailwind to... Over 10 years, you may have doubled the capital base of the company or something, you are going to get some growth out of there. Sometimes it almost feels like the target assumes that the status quo is no growth at all and any growth, wow, we're going to compensate you for that, but the status quo is a certain tailwind. Most companies, they just reinvest part of their earnings at some ROIC and they grow from there. It may be unprofitable growth, it may be terrible in all kinds of ways, but you can probably still get some growth just from the status quo.
MBI:
Yeah, yeah, yeah. For sure. Just one final criticism for Microsoft is, again, it's strange to see this one-year target, even in the long term equity incentive plan, which is a strange thing to say, when you give your executives one-year targets and you renew these targets every year. I would probably prefer it to be more longer term, maybe 5, 10 years. Again, even Satya is not that old, he's 55 years old today and he's been CEO for a while, so there was plenty of time to grant him more longer dated options or RSUs to give him more freedom. It worked out great, obviously, Microsoft has been in a pole position on multiple circular tailwind, but maybe some of that is also luck. If they find themselves in a situation when there are some headwinds, that may constrain them in certain directions, especially given their incentive structure. But obviously, if you have more 5, 10-year period incentive structure, it just gives them more freedom to pursue certain directions, even if that may depress earnings or whatever for a year or two.
Liberty:
Next-
MBI:
Amazon, right? This is the one I got a lot of feedback and-
Liberty:
I can't imagine.
MBI:
A lot of Amazon shareholders came back to me saying, "No, you are wrong, Amazon's incentive structure is pretty good," some said it's probably the best. I'm not sure about the best, but I think if I have to redo it after, again, some more introspections, I do think I would probably make it third instead of fourth. I'll explain that and again, I'll tell you what made me choose it for, again, I'm not really religious about this ranking, I'm just explaining my thought process. First of all, unlike all these other companies, Amazon pays only $175,000 base cash to their CEO. It used to be $80,000 for Jeff Bezos
Liberty:
That's on-brand. That's pretty on-brand for Amazon. They still have the door desks and all of the iconic stuff.
MBI:
Even more, they pay no annual cash or a stock bonus, nothing, zero. No annual cash or stock bonus, only $175,000 to the CEO, and also, for other named executive officers, it's not that they are being stingy with the CEO, they are also kind of stingy with other named executive officers. They also receive $160,000 to $175,000 as base cash salary and again, no annual cash or stock bonus. What do they get? Andy Jassy received significant 10-year RSU grant when he became CEO. I think the RSUs were issued at, after split and all that, $166.70 per share, so it's down almost 40% since then. But there is no relative TSR, there is no relative total shareholder return embedded, so it's just 10-year grant. But good thing is it's all back-loaded, there are some shares he receive in a few years, but a chunk of the RSUs that was granted will actually be available to him after year five.
I think year between year five and nine is the majority of his RSUs, so he can afford to take a longer term view, he doesn't have to necessarily care about the value of the market on a year-to-year basis, he doesn't have any performance metric to meet, annual performance metric or the stock price or real GTS [inaudible 00:36:10] or nothing. But he will just keep receiving the shares on a smaller increment in year one to five and in a larger increment in year five to nine, I think he has a very small amount in year 10. I think the argument from, let's say, a lot of shareholders in Amazon is, "It is my top holding in my own portfolio. "I definitely hear them when they mention, "Look, this company doesn't pay any base cash salary to these extremely highly sought-after executives."
They pay no bonuses, nothing. This company pays nothing to them on a year-on-year basis. Yes, they do pay, it's not generous compared to, let's say, these other companies I mentioned. Satya Nadella gets almost $10 million every year, even if I exclude all these other base or stock awards and things like that. By those standards, it's not overly generous, but obviously, it's Amazon, it's one of the biggest companies in the world, so it's not going to be nothing. It's fairly generous, but it's not fairly generous on a relative basis. On that sort of basis, yes, it's a generous compensation for Andy Jassy. My initial criticism was that if, and he received something like 1.2 million shares, 10 years down the line, if Amazon's trading at $100 a share, he would still receive $122 million. The total RSUs that he was granted in 2021, that itself would be worth $122 million, if he sells nothing in the interim period. My criticism was that's probably too much for a CEO who didn't do a good job over a 10-year period.
When I was thinking of ranking, the thing that I probably valued most is is zero a possible outcome? Obviously, everything can be zero, these companies just can go out of business and then obviously, their RSUs would be worth zero, but how likely is it? For Apple, the probability is high, again, in comparison. For Amazon, obviously, zero is a very unlikely event. Even if he does a very average job, he would end up making a significant amount of money, so that's why I dock them a few marks, if you will. But I can see the argument, this company is fairly stringent on compensation and salaries, they do pay RSU. I think almost every Amazon shareholder I spoke with, they agreed that a performance metric would be better to include, in addition with this incentive structure.
In general, we agree 10-year grant is good. It allows the CEOs to become more long-term oriented, not necessarily to cater to the tourist shareholders, so they cater to the long-term business owners. That's good, I think we can agree on that point, but it would be so much better, from a minority shareholder's perspective, we also had the stock options, where zero is a more likely outcome, instead of these RSUs, and again, some sort of performance metric. I'm not saying it has to be some crazy performance metric like, "Oh, Amazon has to be top 85 percentile for Andy Jassy have 10% RSUs or 10% options."
No, I'm saying that if it fell at 25th percentile of S&P 500, Andy yes, he should probably get some paltry salary that's not $150 million. That's the argument I was making, but again, we cannot think anything in isolation, so the market value for Andy Jassy's skill set is probably higher than what Amazon is paying. In that context, I think Amazon is not being overly generous here. It's a relative game. Obviously, if you are willing to go to other companies, maybe you would receive a more generous offer. It doesn't have to be in Amazon, maybe even Salesforce, who knows?
Liberty:
Just Microsoft would probably pay him pretty well to run Azure or something like that, right?
MBI:
I don't think he is going to go Azure.
Liberty:
No, no, he wouldn't, he wouldn't. But if he was like, "Screw Amazon, I'm done with this company, I'm putting my resume out," I bet he would get some good offers.
MBI:
Let's go to the final one, Meta.
Liberty:
This is the final one, that's interesting, a founder-led company.
MBI:
Finally, a founder-led company. Meta, my impression was they have the worst incentive structure among all these companies, but obviously, it's all relative, but I'll explain. First of all, Mark Zuckerberg, who's the CEO, he receives $1 base salary. Obviously, he owns 13, 14% of the whole company and so it's almost pointless to talk about how much money he receives from the company. Then again, for his personal security, Meta has to spend $25 million, so it is almost, again, similar.
Liberty:
I wonder how that compares to the other Big Tech CEOs. Is the one with the biggest security detail?
MBI:
I think I'm speaking from memory, it could be 1.66 or 16 million for Jeff Bezos. You know what? I think it's open on one of my tabs, so let me see. 1.6 million for Jeff Bezos. For Zuckerberg, Meta definitely spends way more, which I'm fine with. I understand that he is probably not the most well-liked CEOs in the world or in the US, so it's okay, and $35 million is not really huge deal.
Liberty:
It's not going to put them in the poorhouse.
MBI:
Exactly. Anyway, so the other named executive officers at Meta, they get $1 million in base salary and $1 million cash bonus every year. By the way, Sheryl Sandberg, Meta spends actually $10 million for Sheryl Sandberg's personal security, as well. It's not just Zuckerberg, but also for Sheryl Sandberg, as well. The things that I don't like about Meta's incentive structure, and I'll give some counterarguments later why their incentive infrastructure is the way it is, so first of all, it's all time-based RSUs. There is no options or anything like that, it's all time-based RSUs. These are not even 5 years or 10 years, they are four-year RSUs. Every year, as long as you are in your role, as long as you are one of the named executive officers... Obviously, again, Zuckerberg doesn't receive any options, any salaries, any bonuses, nothing, he just receives those personal security expenses from Meta. But other named executive officers, they receive $1 million base salary, $1 million cash bonus, and they receive four-year time-based RSUs, so as long as they are... These are not even back-loaded, so these are just equally vested on a quarterly basis over a four-year period.
Liberty:
Wow.
MBI:
There is no performance metric. It doesn't matter whether Meta is zero or $2 trillion company, obviously, the value of this RSUs will matter a lot, but again, to my earlier point, because these are sizable grants, as long as Meta is not a zero, they come out fairly well. The risk/reward is very, very, very favorable to the management in this incentive structure. There is no relative TSR, like I said, no performance metric. It doesn't matter whether their earnings is 50% down or 50% up, they will still receive those RSUs. There is no target RSU, there is no 100, 200% things, anything like that. That's why I feel like this is not a great incentive structure, from a minority shareholder's perspective. The counterargument is this is a founder-led company and the founder has a very strong vision that he wants to execute no matter what, he doesn't want to be beholden to anyone.
It's fair to say history suggests this particular founder has very non-consensus ideas, from time to time, and in most cases, or it doesn't have to be most, who knows how many non-consensus decisions he chose to take, but at least some of the decisions that mattered, he proved to be right. It took a long time and if he designed incentive structure in a way that makes it difficult to change direction... I think one of the things that I do want to mention here, of these five companies, I think it's consensus that Meta's business is the most vulnerable one and things do change rapidly. Amazon, Google, no matter what people are saying about ChatGTP, this is a stable business, Microsoft, Apple. The world can be a strange place, so who knows what's going to happen? But at least the consensus seems to be those businesses are stable. It's a oiled well machines that they have, it's harder to disrupt. But for Meta, I think the founder himself agrees with the bears, he's like, "Oh yeah, we can be disrupted any day."
Liberty:
We need a platform. We need a platform ASAP.
MBI:
Exactly. He just wants that flexibility to be able to do that.
Liberty:
The incentives make it so that he's not fighting his executives' incentives. They can go along with him without feeling like, "But if I do that, earnings are going to be down for a while, I'm going to get less bonus," so they would do it reluctantly. Well, with this, they have more flexibility to go in whatever direction he wants them to go, which is maybe the point.
MBI:
One thing I do not like about their incentive structure is I feel like when I even looked at their annual cash compensation plan, their annual metrics and stuff, when I read their proxies, it all feels very qualitative, which I hate, because every time I read proxies and look at these sort of metrics, every time, it's based on some qualitative factor, their leaders do great.
Liberty:
They always do great.
MBI:
They do really well. They're all great leaders, they are creating all sorts of cultural dimensions in their own companies, so they do great.
Liberty:
They're all above average.
MBI:
Exactly. It's only the quantitative metrics where some executives seem to fall short. On qualitative factors, they're all great. I feel like when I read Meta's proxy, it definitely seems like there are a lot of qualitative factors. Again, just to go back to the earlier point, maybe it's all based on Zuckerberg's whims and wishes. If they give you things that you did a good job in the long-term trajectory that he wants the company to go, then you probably get 100%, 200%, or whatever he thinks is appropriate. Meta is a public company, so I think some sort of... I understand, these are not completely crazy arguments.
It's not delusional arguments, these are fairish arguments. But then probably, it's better if it is not all very qualitative, it's probably better if there are some quantitative metrics. At least for some named executive officers, at some point they should understand, "Hey, this is our business on Facebook, this is our business on Instagram." They can do some crazy stuff with VR and the AR, but at some point, they need to understand we need to make at least some part of our business as a high cash generating business and it's time. It's been almost 20 years now, so it's time to have some quantitative metric for at least some part of our business, and not just these open-ended, qualitative questions for our named executive officers.
Liberty:
You mentioned also a Peter Thiel to this.
MBI:
He used to be the chair of the Compensation Committee, even Mark Anderson was part of the Compensation Committee. I don't think they had much of a say, to be honest with you. I don't think when they are, if Zuckerberg wanted something... It is Zuckerberg's company, they were the initial backers. I don't think they have much of a say at this point. Peter Thiel is not even in the board anymore. I can be mistaken, but I think Mark Anderson also left. Right now, the chair of the Compensation Committee is PayPal's, I think Peggy Alpert or something. I forgot her name, I don't want to mispronounce it. We all know, I think I discussed in the other podcasts with you, how much I also don't like PayPal's incentive structure. I think it's not necessarily her fault or Peter Thiel's fault. If Zuckerberg ever wanted something different, I'm pretty sure he would get it.
Liberty:
It feels like the kind of system that when things are going well and the stock is riding high, everybody loves it, because it's a founder with a vision and nobody can stop them and founders rule, and when the stock is down and the market is down and the economy is going to the crapper and digital ads are suffering, well, now it's like, "Someone's got to stop this founder, he's crazy. He is not bound by anything."
MBI:
Just to make it clear, I would certainly not want Zuckerberg to leave Meta. At least in my mind, and maybe it's just hearing whom are speaking, the counterargument that I represented, I don't fully buy into those arguments, but these are not crazy arguments, these are not delusional arguments. I can see their case, but I just want probably a better balance, instead of completely open-ended, I just want some sort of balance.
Liberty:
It feels like even if you wanted to achieve what we think he's wanting to achieve, there would be a better way to do it.'.
MBI:
Maybe.
Liberty:
It's not necessarily about the objective, it's about the way to do it could have been more, as you say, more balanced or make more of a distinction between certain parts of the business. Maybe this could finally be the year of shopping on Instagram and all that, all this stuff-
MBI:
Probably not.
Liberty:
... that we've been talking about for a long time.
MBI:
Another thing is, this is something I kind of mentioned before, I feel like Zuckerberg is probably one of the most bearish person on some of the platform he owns. I personally think Facebook will go on for a long time, even if TikTok and all that, if they keep dominating the time spent share and all that, I think the value Facebook provides is probably much stronger than even Zuckerberg likes to think. That's probably part of being a founder, you are always very fastidious, you are fearing your eventual demise.
Liberty:
It's the Andy Grove thing, only the paranoid survives.
MBI:
Exactly.
Liberty:
If you think you've won, if you think it's all done and you can coast, you can rest on your laurels, or insert whatever expression here, usually when you get to that point, it stops working.
MBI:
In the long run, I think paranoia is good. I think it does help you survive [inaudible 00:51:21] business. One of my core points about social media in general, it's an extremely difficult business to make it durable. If anyone can make it durable, it's a founder, it's not going to be a hired executive. That is one of my core thesis points I hold for this space, in general. Again, I'm not expecting any of my executives, any of the companies I own, they will make consistently great decisions. There will be some faults, but the question is whether they can come back from their own learnings and their mistakes. But I think the paranoia is good, but obviously, there are room for improvement for the incentive structures that they have.
Liberty:
It's always the question of are the troubles because of the person or would they be there anyway and someone else would do even worse? People don't think very far, it's easy to blame like, "Oh, Facebook has a bunch of troubles, so it's Zuckerberg's fault." It's like, "Well, the buck stops with him because he's the CEO, but put some random Harvard MBA in there and I'm not really sure they could face all those pressures when you have a very public company. Everybody has an opinion about Facebook, because everybody's spending all their time scrolling to it, it's not some B2B business.
MBI:
If they hired an outside executive, I'm fairly confident the next year's earnings will be higher.
Liberty:
For sure. They would optimize a bunch of stuff.
MBI:
Next thing you know, they will be around in 2035. I'm not confident that they will be around. They will be probably eventually, just another social media company.
Liberty:
It would be pretty easy to pull some levers and cut all of the PR stuff and most of the blue sky R&D stuff and all of a sudden, you'd get a bunch of monster quarters. It would probably last for a while, but I don't know, who knows what's around the corner and if this VR stuff is going to turn out to be the next big platform? We'll see, but it's never boring. It's never boring to watch.
MBI:
How did your 15-minute podcast go?
Liberty:
We almost did it, man. You were so great. We aimed for 15 and we only went over by 50 minutes.
MBI:
I told you, I don't trust myself to speak for only 15 minutes.
Liberty:
It's about quality, not quantity. I don't care about the length, I think it was a good one. I think it was an interesting topic that not enough people discuss in detail like this, so I'm glad you took the time. Thank you very much.
MBI:
No worries. No, great. Thanks for inviting me. I'm always glad to be back.
Liberty:
Awesome. Bye-bye until next time.
MBI:
Bye.
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