Bloomberg Businessweek (Asia)
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”
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 Pondel Wilkinson.
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.