Dear reader, 

Linking chief executive pay to company performance sounds eminently sensible. Why not align the interests of a company’s boss with its investors? Loading executives up with performance-based equity awards has the added benefit of lowering cash spend on base salaries and makes those pesky CEO-to-worker remuneration ratios more difficult to calculate. 

The problem is that it is not always easy for investors to assess the rewards that are on offer. 

Take Uber. 

Last week, the Financial Times reported that Uber’s staggering share price rise this year had resulted in boss Dara Khosrowshahi receiving options to buy stock worth $136mn. This was a reward for the company’s value hitting $120bn. It is a payday that once seemed impossible. The $120bn target was one Uber hoped to hit when it joined markets back in 2019. But the company’s lack of profit and the struggles that rival Lyft faced as a public company led Uber to trim its expectations, first to $100bn then down to just over $82bn. 

Even that was too high for some investors. For years, Uber traded below its listing price. It plummeted in the pandemic as rides were halted. An uptick in food delivery orders did not make up for the drop in bookings elsewhere. 

Uber’s cost-cutting and steady march towards positive net income and free cash flow since then are impressive. After 15 years and billions of dollars of losses, Uber shares now trade 75 per cent above their listing price, topping a $120bn valuation. Khosrowshahi has received his options. 

Yet what might at first look like a simple award turns out to be rather complicated. There is no consensus on the targets used in performance-based pay or the way they are calculated. DoorDash, for example, bases its chief’s reward on share price. Tesla based some of Elon Musk’s gargantuan award on market value. But Uber used a capitalisation figure that required a share count that included options and restricted stock units (RSUs) — a higher number than the market cap. 

Look back a few years and you will see that the terms have changed too. Uber lowered the exercise price of Khosrowshahi’s options from $41.65 to $33.65 in 2018, after an investor put money into the company at a lower value. A year later, Uber joined markets at $42 per share. 

Companies often seem keen to ensure their executives do not lose out. Sven Riethmueller, a professor at Yale Law School, has noted the frequency with which private companies offer low-priced options to executives in the even more narrow preparation period ahead of listings. He refers to these as eleventh-hour discounts. More than half of the companies he looked at offered discounts of 45 per cent or more to the initial public offering price, ensuring a windfall for chiefs and other executives. 

For investors, the ability to assess these awards is important because they make up such a large portion of remuneration. CEO base pay tends to be low. Tech takes this to an extreme. Meta’s Mark Zuckerberg earns a symbolic $1, for example.  

This arrangement is not, as Zuckerberg once claimed, because he has made enough money. Generous rewards come largely in the form of vast stock options, which grant the holder the right to buy stock at a pre-determined price, and RSUs, which vest over time. Some are time-based, others are linked to performance. These can be accounting-related targets, valuation goals or internal company plans. Apple introduced environmental, social and governance targets to its executive bonus calculations in 2021.  

Companies see performance-based awards, particularly those linked to the stock market, as a way to mollify shareholders unhappy at the size of chiefs’ remuneration. Apple increased the performance-linked part of Tim Cook’s pay after investor rebellion. Of course, it does not always work. See the investor revolt over Musk’s huge performance-related deal in 2018. 

Nor do performance-linked awards guarantee outperformance, even those linked to stock price. Market moves can be driven by external forces. Companies would need to factor in the performance of peers to set a truly objective target. That, of course, would mean an even more complicated calculation for investors to tackle.

Elsewhere in the world:  

1. UK chancellor Jeremy Hunt’s move to scrap domicile-based reliefs is radical and may not raise the mooted £2.7bn per year. But domicile is a poorly understood concept that encourages wealthy people to move to Britain while keeping their money elsewhere. Change was overdue.

2. Spacs are not done yet . . . Chinese-owned online brokerage Webull is preparing to list its shares on the Nasdaq via a merger with a special purpose acquisition company. Expect rocky trading. New shareholders will own less than 2 per cent of the company and control zero voting rights. 

3. Who stands to benefit most from Beijing’s increased defence spending? Lex notes that AviChina Industry & Technology, China’s largest helicopter maker, trades at a significant discount to European peers even after its latest share price bump. 

Nara Smith is a young US model who has built up a huge fan base on TikTok with her elaborate cooking videos (lasagne starts with her making her own mozzarella). Now she has unwittingly become the figurehead of an internet fight about Mormonism and so-called “trad wives”. This Rolling Stone profile does a good job of explaining the drama.  

Elon Musk’s lawsuit against OpenAI makes this a good time to draw your attention to an excellent review of Walter Isaacson’s biography of Elon Musk published a few weeks ago. What makes Musk interesting is not just his money or his deals but the ideas behind them. Which other chiefs are tweeting about Roko’s basilisk? By ignoring them, Isaacson fails to explain why so many people are drawn to Musk’s cause. 

Enjoy your weekend,

Elaine Moore
Deputy head of Lex