A colos­sal stock pay­out for two Mon­ster Bev­er­age ex­ecs

The com­pany’s two top ex­ecs got $598 mil­lion from stock op­tions Stock com­pen­sa­tion is “go­ing to have tremen­dous value”

Bloomberg Businessweek (Europe) - - CONTENTS - Caleb Melby, with Caro­line Chen and Bren­dan Cof­fey

A decade ago, back when energy drink maker Mon­ster Bev­er­age was still known as Hansen Nat­u­ral, its two top ex­ec­u­tives re­ceived what ap­peared to be a pretty stan­dard pay pack­age. Be­sides their salaries and ben­e­fits, Chief Executive Of­fi­cer Rod­ney Sacks and Vice Chair­man Hil­ton Schlos­berg also each re­ceived 10-year op­tions to pur­chase shares of the com­pany’s stock. In its 2006 proxy state­ment, Mon­ster said if the shares ap­pre­ci­ated 10 per­cent an­nu­ally, each award could be worth $28.7 mil­lion by 2015. That per­cent­age es­ti­mate was used to meet a U.S. Se­cu­ri­ties and Ex­change Com­mis­sion re­quire­ment to show 5 per­cent and 10 per­cent ap­pre­ci­a­tion es­ti­mates in prox­ies, the com­pany said at the time, and “do not rep­re­sent our es­ti­mates or pro­jec­tions.”

In­stead, en­er­gized by a big in­vest­ment from Coca-Cola in 2015, Mon­ster shares ended up soaring more than 30 per­cent a year, leav­ing Sacks and Schlos­berg each with re­al­ized gains of $299 mil­lion—the high­est among U.S. ex­ec­u­tives in 2015, ac­cord­ing to data com­piled by Bloomberg.

Ev­ery year, com­pa­nies grant stock to ex­ec­u­tives as in­cen­tives to spur growth and in­crease prof­itabil­ity. Those awards, in­cluded in the summary

com­pen­sa­tion ta­ble in an­nual proxy state­ments, get the most at­ten­tion from in­vestors, an­a­lysts, and the press when first dis­closed. Less at­ten­tion is paid to an­other ta­ble show­ing how much ex­ec­u­tives ac­tu­ally earn as they ex­er­cise op­tions and re­ceive shares granted in pre­vi­ous years. Those fig­ures can vary sig­nif­i­cantly from com­pany es­ti­mates.

“The point of stock op­tions, and how they’re val­ued, is that many will end up never be­ing in the money. Some will be a lit­tle bit in the money,” says Eric Hosken, a part­ner at Com­pen­sa­tion Ad­vi­sory Part­ners in New York. A third group of op­tions is “go­ing to have tremen­dous value.”

Sacks and Schlos­berg de­clined to com­ment be­yond the fil­ings, ac­cord­ing to Judy Lin Sfetcu, a spokes­woman for Mon­ster at in­vestor re­la­tions firm Pon­delWilkin­son.

New stock awards are typ­i­cally val­ued based on the share price on the day they’re granted, and their ac­tual worth changes when­ever the stock trades. The num­ber of shares ex­ec­u­tives get of­ten de­pends on how com­pa­nies per­form against tar­gets such as earn­ings per share or revenue growth.

Op­tions are even more dif­fi­cult to value be­cause their ex­er­cise price is equal to the share price on the day they’re granted, mean­ing that, at that mo­ment, they have a func­tional value of zero. So com­pa­nies use for­mu­las such as the Black-Sc­holes pric­ing model, which ac­counts for vari­ables in­clud­ing volatil­ity in share price and how long ex­ec­u­tives have to ex­er­cise op­tions, to get an es­ti­mate of what the op­tions might be worth in the fu­ture.

But those are just es­ti­mates. Some­times they come in low, as at Mon­ster. It would have been hard to pre­dict in 2005, when the op­tions were granted, that Coca-Cola would ac­quire 17 per­cent of Mon­ster for $2.15 bil­lion 10 years later, mak­ing bil­lion­aires of Sacks and Schlos­berg, thanks to their

stock and op­tion hold­ings. Of course, some­times the es­ti­mates can be high: Just ask ex­ec­u­tives at com­pa­nies in the S&P 500 Energy In­dex, which saw their stocks plunge 31 per­cent on av­er­age in the past two years as OPEC al­lowed an oil glut to send prices to their low­est lev­els in a decade. There’s no in­put in Black­S­c­holes for sur­prises like that.

Executive pay is usu­ally skewed to­ward stock com­pen­sa­tion. Sacks and Schlos­berg, for in­stance, each re­ceived $1.2 mil­lion in cash, bonuses, and perks in 2015—less than 1 per­cent of their to­tal pay for the year.

The Mon­ster ex­ec­u­tives weren’t alone in re­ceiv­ing stock-based pay last year that far ex­ceeded ini­tial es­ti­mates. John Martin, executive chair­man of Gilead Sciences, had the fourth-largest take­home fig­ure with $232 mil­lion, about 70 per­cent from ex­er­cis­ing op­tions granted in 2006. At the time, Gilead val­ued the award at $11.2 mil­lion. Then it de­vel­oped the first ef­fec­tive cure for hep­ati­tis C, which af­fects about 150 mil­lion peo­ple glob­ally. That more than tripled Gilead’s revenue from 2012 to 2015. The com­pany’s shares—and the value of Martin’s op­tions—soared. Dur­ing his ten­ure as CEO, “Gilead de­liv­ered sub­stan­tial value to pa­tients, stock­hold­ers, and health-care sys­tems around the world,” Gilead spokes­woman Michele Rest said in an e-mail.

Like­wise, Net­flix CEO Reed Hast­ings had the fifth-big­gest sum in 2015, $178 mil­lion, al­most en­tirely from ex­er­cis­ing op­tions, many from as long ago as 2005, when the com­pany had less than $1 bil­lion in revenue. Sales were $6.8 bil­lion last year as the video-on­de­mand provider at­tracted 45 mil­lion U.S. sub­scribers.

Blackstone Group Chief Op­er­at­ing Of­fi­cer Tony James earned the third­largest sum in 2015: $250.2 mil­lion. Most of his pay­out came from stock awards in­clud­ing shares val­ued at $174.3 mil­lion when they vested. James has for years been among the ex­ec­u­tives taking home the most com­pen­sa­tion, thanks to eq­uity awards granted in con­nec­tion to Blackstone’s June 2007 ini­tial public of­fer­ing. But James’s pay his­tory shows that op­tion value es­ti­mates can be off­base in both di­rec­tions. The pri­vate eq­uity firm granted him 32.9 mil­lion shares, val­ued at $1.02 bil­lion in 2007, that would vest over eight years. They’re now worth $864 mil­lion.

Spokeswomen for Net­flix and Blackstone say the com­pa­nies de­clined to com­ment be­yond the fil­ings. Peter Grauer, chair­man of Bloomberg LP, par­ent of Bloomberg Busi­ness­week, is a nonex­ec­u­tive direc­tor at Blackstone.

The bot­tom line Com­pa­nies es­ti­mate the fu­ture value of stock com­pen­sa­tion they give. But if share prices soar, so can ex­ec­u­tives’ pay­checks.

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