Skype's Executive Compensation Conundrum

[HardOCP News]

I learned a new phrase today..."clawback." It is what company do when they want to screw you out of vested / unvested stock options you "thought" you had.

Yee, who says he worked in Silicon Valley for more than 15 years, learned that the company's stock option agreement had a special "clawback" clause that gives the company the right to "repurchase" vested shares from any employee who voluntarily resigns or is terminated for cause --"effectively taking 'vested' shares and making them worthless," he said.

 

[Zarathustra[H]]

I learned a new phrase today..."clawback." It is what company do when they want to screw you out of vested / unvested stock options you "thought" you had.

Clawback clauses can be very useful things to keep executives in check.

If the major banks had had clawback clauses on their bonuses chances are we wouldn't have had the same housing bubble and bust.

The problem with traditional stock and cash bonuses is that they are given on an annual basis and thus reward short term performance. If you pursue an action that is great short term but disastrous long term, you make off like a bandit even though the company suffers.

With clawbacks, those who get bonuses are forced to think of the long term consequences of their actions, and - it is hoped - act more responsibly.

Clawbacks based on long term performance are a universally good thing for driving corporate responsibility.

In this case - though I don't have the full story - Skype may have misused the concept.

 

[Zarathustra[H]]

In this case - though I don't have the full story - Skype may have misused the concept.

That being said, I find it hard to work up compassion for some wealthy executive. He probably made more money in the year preceding his firing than I'll make in 10. I'm sure he'll be just fine without his stock options.

 

[Hamish Campbell]

Clawback clauses can be very useful things to keep executives in check.

If the major banks had had clawback clauses on their bonuses chances are we wouldn't have had the same housing bubble and bust.

The problem with traditional stock and cash bonuses is that they are given on an annual basis and thus reward short term performance. If you pursue an action that is great short term but disastrous long term, you make off like a bandit even though the company suffers.

With clawbacks, those who get bonuses are forced to think of the long term consequences of their actions, and - it is hoped - act more responsibly.

Clawbacks based on long term performance are a universally good thing for driving corporate responsibility.

In this case - though I don't have the full story - Skype may have misused the concept.

Good post, would read again.

 

[dioxholster]

clawback sounds like an awesome game.

 

[qdemn7]

So some high paid "talent" got screwed. Which is what the "talent" does to regular employees all the time. And the employees are told it's the way business is done these days. Sounds like karma for the "talent".

 

[/usr/sbin]

So some high paid "talent" got screwed. Which is what the "talent" does to regular employees all the time. And the employees are told it's the way business is done these days. Sounds like karma for the "talent".

My thoughts exactly.

 

[TwistedAegis]

Clawback clauses for bonuses are a great thing. Hey look - I fired 95% of the staff, thus outperforming profit expectations by 95% this year! I get a $10 million dollar bonus! Next year, we go out of business due to having no staff, but I'm too busy getting massaged by Natalia in the Grand Caymans to give a flying f!

 

[Casus]

So some high paid "talent" got screwed. Which is what the "talent" does to regular employees all the time. And the employees are told it's the way business is done these days. Sounds like karma for the "talent".

Lets pause for a moment and weep for the millions the millionaires will have slightly less of now.

 

[Uncle]

Clawback clauses for bonuses are a great thing. Hey look - I fired 95% of the staff, thus outperforming profit expectations by 95% this year! I get a $10 million dollar bonus! Next year, we go out of business due to having no staff, but I'm too busy getting massaged by Natalia in the Grand Caymans to give a flying f!

I'd even like to see clawbacks extended for 1 to 2 years after they let these executives go or they leave voluntarily,in case improprieties are found after he leaves. It would be good if executives left with a CLEAN slate for the next person in charge, hopefully clawbacks would give him that incentive.

 

[computerpro3]

Since clawbacks are so great, I think we should have them for every employee.

 

[computerpro3]

Hell, let's extend them for two years as well so if your boss finds out you were on facebook during work he can take back your salary.

 

[Uncle]

Since clawbacks are so great, I think we should have them for every employee.

They have started. Tim Hortons doughnut franchise starts paying their employees 10 bucks an hour, if they are late once during their two week paycheck, they get paid 9 bucks an hr for the full two weeks, then start at 10 again. Any ideas how this can be utilized at the executive level.

 

[dioxholster]

CLAWBACK RATED M for MATURE!! a PC EXCLUSIVE


i like it too, you should have it for the president.

 

[Kaitian]

They have started. Tim Hortons doughnut franchise starts paying their employees 10 bucks an hour, if they are late once during their two week paycheck, they get paid 9 bucks an hr for the full two weeks, then start at 10 again. Any ideas how this can be utilized at the executive level.

How is this even legal? Unless your pay is written down in contract, I don't see how this is legal.

 

[Uncle]

How is this even legal? Unless your pay is written down in contract, I don't see how this is legal.

Lets reverse it and call it a bonus. You start at 9 hr if your not late once you get a bonus of 10 hr. To the young,for some reason, it probably has a better affect if it looks like your being penalized.

 

[computerpro3]

Lets reverse it and call it a bonus. You start at 9 hr if your not late once you get a bonus of 10 hr. To the young,for some reason, it probably has a better affect if it looks like your being penalized.

If you're going to call it a performance bonus, then it already is being affected at the executive level.

My point stands - if clawbacks are so great, how come you don't want one in your contract?

 

[Chimel]

The problem with traditional stock and cash bonuses is that they are given on an annual basis and thus reward short term performance. If you pursue an action that is great short term but disastrous long term, you make off like a bandit even though the company suffers.
With clawbacks, those who get bonuses are forced to think of the long term consequences of their actions, and - it is hoped - act more responsibly.
Clawbacks based on long term performance are a universally good thing for driving corporate responsibility.

These are neither stock nor cash, but stock options, which are typically granted for one year's performance but can only be vested in the long term (for instance 20% every year for 5 years). But I'll give it to you that even stock options are not meant to reward long term performance, they were created to encourage the smart people to stay with the company. If your performance was catastrophic for 5 years and you were not fired for it, you still get your stock options in full at the end of the vesting period, from the one grant 5 years ago when your performance was good.

Once you vest them (i.e. purchase them with your own money at the price fixed in the grant), stock options become normal stock that you own. The small print clause mentioned although totally cryptic does not say anywhere that you don't own these vested stocks, so that's weird and I don't understand how you can lose money unless the clause specifies that Skype can repurchase the vested stocks at the fixed price in your contract instead of the market price, which I also didn't see in the clause.
Such a clause would be stupid anyway, as anybody with vested stock could just sell them and immediately repurchase them at the same price or about, which would effectively make the stock your own property in a different transaction, and not directly from exercising your option to purchase. So such a clause is clearly from a company that tries to mess around with its employees, and that is a recipe for disaster.

All of the above is of course assuming the stock price increased between the time your options were granted and you decide to vest them.

 

[srangara]

Once you vest them (i.e. purchase them with your own money at the price fixed in the grant), stock options become normal stock that you own. The small print clause mentioned although totally cryptic does not say anywhere that you don't own these vested stocks, so that's weird and I don't understand how you can lose money unless the clause specifies that Skype can repurchase the vested stocks at the fixed price in your contract instead of the market price, which I also didn't see in the clause.

Such a clause would be stupid anyway, as anybody with vested stock could just sell them and immediately repurchase them at the same price or about, which would effectively make the stock your own property in a different transaction, and not directly from exercising your option to purchase. So such a clause is clearly from a company that tries to mess around with its employees, and that is a recipe for disaster.

All of the above is of course assuming the stock price increased between the time your options were granted and you decide to vest them.

No: Vested stock is available for purchase. You haven't spent any money until you exercise the option. This clause seems to force the owner to exercise (and sell) their options... which doesn't seem like such a bad thing to me, either. It doesn't sound like they aren't getting the difference in value.

Most importantly, the employees affected by the clawback aren't employees anymore. They are former employees with an opportunity to cripple the stock by suddenly performing a cashless exercise--getting the money from buying (at the option price) and selling (at the market price) without owning a single share--at any time in the future up to the option expiration date. That's a huge potential liability.

Furthermore, the clause specifically targets employees who voluntarily resign or are terminated with cause. That's not a lay off or a workforce reduction. These are people you no longer want to have any control of your company.

 

[EchtoGammut]

I love how Skype also fired a good chunk of their Executives so their stock options would be worth less than if they were still with the company after Microsoft's takeover. I never had an opinion of Skype, but they have shown themselves to be amongst the seedier silicon valley companies. I have never heard of a board of directors so totally screwing upper management. It really sucks for the Qik guys who probably saw the Microsoft deal as a payday, only to find themselves canned. That is not saying they probably didn't get a decent paycheck from the Skype merger, but to get tossed so their options would be worth less is pretty low.

 

[raz-0]

Maybe that clawback is really odd for a TLA exectuive type, but I've seen it more or less that language in contracts for jobs I have had. The big difference from the quote, I dunno if it was stipulated elsewhere in the contract, was that there were terms regarding the repurchase price that boiled down to "these shares are worth a minimum of $X, so that if we close our doors, you can get in line with the rest of investors to see if there's any money for you, or if we fire you or you quit, we must pay at least that much per share to get vested shares back. We are not obligated to buy them back. If the business is sold, the shares shall be worth no less than Y% of the sale price of the company divided by the outstanding shares of this type. Any price tendered above and beyond that is at the sole discretion of the voting shareholders."

Maybe the big executives will go on strike because their parachutes are not golden enough. I hope they try that.

 

[TwistedAegis]

Clawbacks are best for large bonus paid out for work in which the end result won't be known for a while. So for those donut shop workers, you pretty much know what you get out of them each 8 hours they work. If they don't do a good job, you aren't out a huge amount of money.

Now take a Wall St deal-maker. He sets up CDS' that on paper made the company $250 million, thus gets a nice $10-25 million dollar bonus. But in reality, the underlying deal is a piece of crap and within 3 years the company not only loses their initial investment into the deal but is liable for hundreds of millions more in payouts.

Playing at that kind of level, you set up really messed up incentives when you only profit when things are good, and don't lose money when things go bad. Like sub-prime mortgage brokers - they got paid tens of thousands of dollars up front to make loans, and then sold them off to investors. They had 0 downside.