Netflix CEO Reed Hastings Reaping Benefits Of Soaring Stock Price

reed_hastings_netflix

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:

yahoo_netflix

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.

 

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  • http://www.myexperiments.net PasadenaPete

    Reed Hastings is my absolute hero. Netflix has redefined customer service and efficiency. Everyone I have recommended Netflix to has taken the trouble to thank me and comment on how great it is. I put a DVD in the mail yesterday and they sent me an email saying they had received it and are sending out my next one today. How can you beat that?

    He is also deeply involved in education, one of the few bright spots I have seen in that area lately. I notice he is on the Microsoft board now, maybe he will put his ability together with Gates money to further Gates goal of having an impact on education. You can only hope.

  • http://www.chasing-dreams.com Chasing Dreams

    It’s about time some one gave Blockbuster and Hollywood video a run for their money. You can never be late with Netflix, however I now see Blockbuster is going after Netfix and Red Box. Good luck Chasing Dreams.

  • http://willworkforjustice.blogspot.com Matt Raft

    That’s nice, but what about Mr. Hasting’s failure to include captioning technology in online streaming? Hulu, YouTube, and even Virgin Airlines manages to have online captioning, but not Netflix. Netflix’s lagging captioning technology is harming its ability to serve senior citizens and hearing-impaired viewers.

  • http://www.mobolinks.com Steve

    Netflix did really well and its going in right direction but I think it will get harder and harder for them to grow because new competition will come in soon.

  • DIANE BUCKLIN

    I WAS TOTALLY UPSET ABOUT THE RAISE IN FEES TO THE NETFLIX CUSTOMERS! 60% IS NOTHING BUT GREED!!! THIS IS WHY AMERICA IS STILL IN BAD STRAIGHTS AS “GREED” HAS BECOME COMMON PRACTICE.
    JUST HOW MUCH MONEY CAN YOU SPEND IN A LIFETIME??? THE NEXT
    RAISE NETFLIX GIVES ME—I AM GONE! SORRY I HAD TO WRITE TO YOU, BUT TRY AS I MAY, I CANNOT FIND ANYPLACE TO “EMAIL” NETFLIX OF MY DISGUST ABOUT THEIR RAISE TO CUSTOMERS. YOU CAN WAIT FOR 8 OR MORE MINUTES TO TALK TO SOMEONE—NOT AN OPTION.

    VERY UPSET WITH US COMPANIES,

    DIANE BUCKLIN

  • donnnie

    Reed Hastings hates the USA.. after netflix jacked its prices 60 percent for the exact same service, i canceled. they will not refund my remaining 27 days (which is theft). Hastings charges Americans 100 percent more than Canadian Netflix and includes much more content on Canadian instant streaming. In response to a reporter asking whether he was concerned that this would upset Americans, Hastings replied by saying that Americans are extremely self absorbed and don’t pay attention to anything that doesn’t happen in the USA. This company will fail. The stock price will return to where it started as competitors enter the market and actually care and pay attention to their CUSTOMERS.

 
 
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