You Should Be Outraged By Hasbro's $35 Million Executive Compensation Scheme
Ken is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earlier this month, Hasbro (NASDAQ: HAS) disclosed that its CEO, Brian Goldner, is entitled to a grant of 587,294 restricted stock units (RSU). The RSUs are conditioned on Mr. Goldner’s continued employment with Hasbro through the next five years and on the performance of Hasbro’s stock. In order to meet the vesting requirements of the RSUs, Hasbro shares must trade at or above certain price thresholds for at least 30 consecutive trading days between now and 2017. The price thresholds are detailed in this chart:
Source: Hasbro 8-k
Certain commentators are applauding the RSU grant. For example, Seeking Alpha contributor Alan Brochstein argues:
This powerful incentive aligns him well with outside shareholders. There are about 130mm shares, so this "Special RSU Grant" would mean that for him to earn his $35mm (in stock), the value of the company would increase by $2.86 billion. If the stock goes up only 18% (to 44.99), he gets nothing.
I could not disagree more with Mr. Brochstein. The only "outside shareholders" whose interests are aligned with Goldner's RSU Grant are short term traders, not long-term buy-and-hold investors like myself. These are my grievances with Hasbro's Executive Compensation Scheme.
A Rising Ticker Price Isn't Always Good News ...
First, Hasbro is a company with a stock buyback plan in place. The company spent $2.5 billion over the past seven years on share repurchases and has an ongoing repurchase authorization. Investor's who own companies with buybacks shouldn't rejoice when ticker prices start to rise. Certainly, they shouldn't compensate their CEOs based on ticker prices. Resisting the natural urge to celebrate when shares trade higher may seem counterintuitive, so I will turn to the Oracle of Omaha to explain the logic. In Warren Buffett's most recent letter to shareholders of Berkshire Hathaway (NYSE: BRK-B) (NYSE: BRK-A) he argues:
If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.
Go-Go Buybacks Go South
We’ve seen this before with Netflix (NASDAQ: NFLX). Reed Hasting leveraged up Netflix’s balance sheet and used some of that cash to fund stock buyback’s at increasingly outrageous valuations. This type of activity can induce traders to flood into a stock, but it is damaging to long term business holders. In the case of Netflix, Reed Hastings eventually was forced to dilute shareholders to raise capital after the Quikster debacle. Certainly, Hasbro is not Netflix. Hasbro is a solid and stable company with a lineage stretching back several decades. Its dividend yields over 3%. This is a safe conservative company for investors who need income and expect to see the company continue to unlock the value of its intellectual property. Hasbro is the type of company that retirees should consider holding. These conservative expectations are precisely why shareholders should be wary of go-go stock price compensation schemes that prioritize ticker movements over improved business fundamentals.
Instead of encouraging Mr. Goldner to goose Hasbro's ticker price, the board should consider alternative approaches. For example, Goldner's pay might be linked to improving fundamental business metrics. Paying down debt, improving Return on Invested Capital, and turning around flagging sales are good starting points for alternative compensation schemes. Another area where I would love to see Goldner focus is on continuing to rebrand Hasbro's toys for the 21st century. Compensating our CEO for continuing to successfully integrate iconic brands like Furby with Apple's iPad are moves I can get behind.
Mr. Goldner, You Make Me Paranoid!
A second reason I hate this trade-based compensation scheme is because it makes me more paranoid when I read into Goldner's management decisions. Case in point: Hasbro reported its third quarter earnings a couple days ago. On the conference call, the company boasted that it is investing less in creating new content for its children's television network, The Hub. I could be convinced that rerunning old content is a smart move to exploit the "Long Tail" of existing cartoons. Unfortunately, that will take a lot more convincing because Hasbro's CEO will make millions of dollars if he can cut the fat from long-term projects (like making new cartoons) in order to give margins a short term boost. This is similar to the sinking feeling I get when a technology CEO cuts R&D dollars to give earnings a quick, yet short lived, kick in the pants. Or is it more like the boat captain who needs to make his balance sheet add up, so he auctions off the sails?
Trusting the CEOs who run the companies I own is essential. I don't want to trade in and out of companies based on every twist and turn in the road. I want to be able to take a nap and wake up in five years with the business brighter, debt lighter, and a clear runway to success. With Hasbro, I can't turn off the talking heads on CNBC. I need to start worrying. Thanks to this compensation scheme, I need to interrogate every move Mr. Goldner makes.
The Ideal CEO Thinks Like an Owner-Founder
My ideal CEO is a leader who acts as an "owner-founder." Matt Koppenheffer wrote a fanastic article that details the arguments in favor of buying shares of companies with CEOs who are a class above Mr. Goldner. Investors should read Koppenheffer's article and then encourage Hasbro's board to do the same.
Goldner's RSUs vest in 2017. Five years might seem like a long time, but I don't think it is that long. If a CEO has an opportunity to make sizable investments that should pay even larger dividends in 7-10 years, I want them to have the flexibility to make those business-wise moves. This is the type of big thinking that underlies Amazon's (NASDAQ: AMZN) CEO's willingness to sacrifice today in order to take market share tomorrow. Jeff Bezos is crushing his company's earnings in the near term in order to expand Amazon's fulfillment network. In Mr. Bezos' own words, "Its all about the long term."
The market might not get these types of "big investments" in the short run, so Hasbro's stock compensation package means Goldner is making a poor choice by rolling out a long term strategy. Some stories take a couple years to play out -- they are not ticker smart, but business smart. If the CEO makes intelligent decisions and has the capacity to communicate those decisions to investors, the stock price will take care of itself.
BoiseKen owns shares of Apple, Amazon.com, Netflix, Hasbro, and Berkshire Hathaway. The Motley Fool owns shares of Apple, Amazon.com, Berkshire Hathaway, Hasbro, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, Berkshire Hathaway, Hasbro, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.