SiliconBeat

There are plenty of CEOs in Silicon Valley that I could pick on when it comes to executive compensation. And when I do, I inevitably get an email from a reader accusing me of being resentful that someone else is simply making a lot of money. But that’s not true.

And as evidence, let me now praise Netflix CEO Reed Hastings. He’s making cash by the barrel full these days. And he deserves it.

I’ve singled Hastings out for the masterful way he’s steered Netflix through countless challenges. As I noted in this blog post earlier this year, Netflix has constantly been written off for dead. And each time, it’s come back even stronger. It’s repeatedly defied its critics expectations. And Hastings, who has been at the helm for about a decade, deserves a big share of the credit.

Were this your typical company and your typical CEO, you might also expect to find his executive compensation to be lavish. It’s not, but it’s been growing week by week. That’s almost entirely due to the performance of the company, and the growing value the company has created for shareholders. In a couple of ways, Netflix has done a remarkable job of tying pay to performance, which is why I don’t begrudge Hastings his growing pot of loot.

Let’s take a closer look at how that works.

First, we’ll start with something that Netflix does not do: Pay bonuses to executives. That’s extraordinary. From the company’s most recent proxy filing:

“The Company does not currently provide a program of performance bonuses for its Named Executive Officers. The Company expects all individuals to perform at a level deserving of a bonus and therefore such bonus amounts are taken into consideration in determining total compensation for the Company’s employees.”

Show up and do your job. There’s a novel concept.

The company then sets an overall target for what it wants to pay its executives, but it does allow the individuals to request how much of that they want in cash vs. stock. That means each person can determine how much risk they want to build into their pay. Once they do that, Netflix then allocates the options in equal amounts each month over the course of the year, with the strike price fluctuating along the way. So rather than just giving executives one big chunk at the start of the year, in a kind of all or nothing gambit, the piecemeal system does two things. It likely limits the upside, but also probably keeps more options in the money in the event the stock dips.

Look at it another way: If you flip the stock right away, your profit will be limited because the strike price will be based on the latest value at the start of the month. If you hold it for the longer term, there’s going to be more potential profit.

So let’s circle back to Hastings.

In 2008 and 2009, he was paid about $1 million in salary and received about $1.7 million in stock options each year, for a total package worth around $2.7 million. By valley standards, that’s cheap.

Since Netflix went public in May 2002, Hastings has established a pattern of stock sales from which he’s never deviated. He sells a chunk of 20,000 shares every two weeks like clockwork. For many years, these resulted in such small sales that they barely got any notice. His first sale in February 2003, when Netflix stock was just over $6 per share, was worth $126,550.

More recently though, I noticed that Hastings was often showing up in the Mercury News’ list of top stock sales each week. I wondered if he had accelerated his sales. Nope. Instead, Hastings is benefiting from the 239 percent increase in the company’s stock price over the past year.

So when Hastings sold his 20,000 shares on Sept. 2, Netflix stock was trading between $134.30 and $148.78, making the sale worth $2.8 million.

Over the past seven years, Hastings has now sold 3.35 million shares to raise $118 million. That’s somewhat offset by the $1.7 million he spent to exercise 964,152 options. But that still gives him a net profit on sales over $116 million.

That comes out to an average of $15.5 million in annual take home pay for Hastings, when you combine salary and net stock sales. That’s a lot for you and me. But it’s modest by Silicon Valley standards. And more important, it’s well deserved when your stock chart looks like this:

That kind of restraint shows the faith Hastings and his board have in the long term vision he has for Netflix. The only lament here is that this kind of mentality is still more the exception than the rule. Perhaps I may be naive in hoping that other boards might look at run of success Netflix has had and wonder if they should rethink their executive compensation principles.

Makers by Cory Doctorow

My rating: 4 of 5 stars

What’s not to like about a book where the main character is a business columnist at the San Jose Mercury News? But Doctorow’s glimpse at the near future makes it difficult to love. The book hits a bunch of themes that would be familiar to anyone who follows Doctorow’s writing: The nature of closed vs. open systems of innovation; the wonder of making stuff and hacking.

But having just finished the book, it’s hard to say how Doctorow wants us to feel about the kind of future these things are creating.  I would assume him to be a champion of open source, but the characters who fall into that camp don’t necessarily get happy endings. And in fact, they help generate a bubble that proves economically devastating not once, but twice. One of them becomes hooked on a future weight-loss program that eliminates almost all overweight people, but eventually turns out to cause horrific health problems. Technology, in this book, causes problems sometimes worse than the ones it solves.

The characters celebrate the world they live in, where the unemployed have built shantytowns from scratch as an alternative to developer driven housing models. But as a model of people making for themselves, well, these shantytowns don’t sound all that wonderful.

In the end, the message of the book is ambiguous. I’m not sure how Doctorow wants me to feel about this world, as intriguing as it is. It seems definitely more dystopian than utopian. And yet, at times he seems to be celebrating it, certainly not condeming it, and certainly never glamorizing it.

That may well be the intention, to leave us feeling ambivalent about where the future it taking us. Makers certainly offers no easy or obvious lessons about these questions. But the questions it raises made it a compelling read.

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Last last year, in my annual prediction column, I included one far-out, wacky suggestion: Cisco Systems would buy Dell.

Though admittedly a long shot, my rationale was that Hewlett-Packard was moving into networking with its purchase of 3Com. That made it a direct competitor with Cisco. Both companies want to fight for big corporate customers, but HP has an advantage by simply being bigger. Though PCs are a dicey business, the best way for Cisco to level the playing field would be to buy Dell.

I’ve put that out of mind until the last few weeks when a series of events got me thinking that it could make sense. And now there’s a twist: Could Oracle be interested in Dell? I posted a short thought about this on Facebook yesterday after Oracle officially announced it was hiring Mark Hurd, the ousted CEO of HP. They now have a co-president with extensive experience running the largest PC maker in the world. Imagine what Hurd could do with Dell? And what delicious revenge it might be for him to take on HP in the PC business?

A year ago, I would have never thought about Oracle buying a PC company. But now that they’ve done the unthinkable and plunged headlong into hardware by buying Sun Microsystems, how much crazier would it be to see them buy Dell? In fact, yesterday, Quentin Hardy of Forbes also mused about the possibility of Oracle buying Dell:

“The last big Oracle buy was Sun Microsystems. At the time, people liked the software Oracle got from that deal, but wondered what to do with the hardware. Sure, it could sell high-performing Sun servers loaded with Oracle database and application software, but at what acquisition cost?

That deal makes more sense if Oracle adds to its hardware offerings with a comprehensive desktop and laptop offering. Dell has that, along with servers, storage, and a little network switching. More important, it has extensive corporate relations in selling to different parts of a corporate base than Oracle now touches.”

The company in the middle now is Dell. Following their loss in the 3PAR bidding, they are a wounded duck. They have a market cap of $24.4 billion, and annual revenue that fell last year to $52.9 billion.

By comparison:

• Cisco has a market cap of $117.4 billion and annual revenue of $36.1 billion.
• HP has  a market cap of $82.9 billion and annual revenue of $114.b5 billion in 2009.
• Oracle has a market cap of $120.4 billion and annual revenue of $26.8 billion.
• Microsoft has a market cap of $206.23 billion and annual revenue of $62.5 billion.
• IBM has a market cap of $158.5 billion and annual revenue of $95.8 billion.

I mention Microsoft only because of something Oracle founder Larry Ellison said a few years ago when he predicted the IT industry would consolidate. Ellison said there would be a handful of giants left at the end of the day, including Microsoft, HP, IBM, and a couple others. (I don’t remember the exact list, but I think there were five).

In any case, he wanted to make sure Oracle was one of the few giants left. And so he said Oracle needed to acquire large numbers of companies to boost its revenues and size to keep pace with companies like Microsoft. Being bigger would allow the company to spread costs such as R&D over a wider base, Ellison said.

That rationale remains as true today as it was then. Dell, first and foremost, needs to get much larger to remain competitive with HP. The fastest way to get there is acquisitions. But we’ve seen that Dell doesn’t have the resources to go toe-to-toe with HP. In fact, HP could simply starve Dell by outbidding them time and time again.

No, the best option for Dell at this point is to be acquired. But by which company?

HP probably couldn’t buy Dell without getting hung up on anti-trust issues. But if Cisco bought Dell, you would have a company with close to $90 billion in annual revenue, a number that significantly closes the gap with HP. And if Oracle bought Dell, you’d have a company with more than $60 billion in annual revenue, still only about half HP’s revenue, but closer.

Over at Silicon Valley Watcher, Tom Foremski wondered whether Oracle might buy HP:

“Yes, it is a big pill to swallow however, it would enable Larry Ellison, CEO and co-founder of Oracle to perform an end run in the massive global IT market and also leave a substantial legacy on his upcoming retirement.

If there is one thing we know about Larry Ellison is that he is motivated by big goals. Is this one too large for him?”

While I see Tom’s logic, I still find this scenario to be unlikely. Oracle has a lot of money, but it would probably need to make a hostile, all-cash bid for HP, which would be way too expensive. It would have to borrow massive amounts and take on big debt. Oracle’s stock wouldn’t be that attractive to HP shareholders, given that until the last couple months, Oracle and HP stock prices have tracked pretty close together:

However this plays out, expect lots of drama over the next few months. There’s no love lost between these companies. And with the economy stagnant, big players have clearly decided that acquisitions are the way to grow.

Who is the happiest man in Silicon Valley today? It has to be David Scott, chief executive of 3PAR. If he’s not the happiest, then he’s at least the guy who has made the most money in the past month thanks to the over-the-top bidding war for his previously obscure company.

According to a proxy filing in July 2010, Scott owned 2,923,468 shares in 3PAR, or about 4.6 percent of the company’s stock. On Aug. 13, those shares closed at $9.65 per share, making them worth $28,211,466.20.

Cue the bidding war. Dell threw in the towel on Thursday after Hewlett Packard offered to pay $33 per share. That makes Scott’s shares worth $96,474,444. That’s a nice 350 percent return in about three weeks.

The other big winners:

• Mayfield Fund holds 2,992,752 shares, about 4.8 percent, worth $98,760,816.
• Menlo Ventures holds 9,371,361 shares, about 15 percent, worth $30,925,4913.
• Worldview Technology Partners holds 8,382,058 shares, about 13.4 percent, worth $276,607,914.
• FMR LLC holds 7,643,890 shares, about 12.2 percent, worth $252,248,370.