Performance Related Pay? $109 Million for 15 Months Work!

Okay, call me old-fashioned, but I think paying anyone $109 million for 15 months’ work is completely crazy. However, paying this kind of money to someone who hasn’t performed and delivered results is simply criminal!

So who is this lucky jackpot winner? It is Henrique De Castro who was, until just recently, the Chief Operating Officer at Yahoo. De Castro was recruited from Google, where he was VP of Google’s Partner Business Solutions group and oversaw the creation of its display ad business.

When Marissa Mayer took over as CEO in July 2012, Yahoo was in urgent need of a turnaround and a boost in advertising revenue. In November 2012, Mayer, who also came from Google, made De Castro her No. 2 and gave him the task of growing the display adverting business.

For whatever reason, De Castro (48) received an astronomical pay package, making him one of the highest paid executives in Silicon Valley. According to Forbes, De Castro was making $39 million a year as COO of Yahoo (apparently more than CEO Mayer). Bloomberg reports that De Castro will now receive a handsome severance package making his 15 month stint at Yahoo worth a mouthwatering $109 million.

The problem I have with all this is that De Castro failed to perform. Mayer made it very clear in her announcements about De Castro that she was disappointed with his performance. And rightly so: Yahoo has failed to make up any lost ground. According to the Economic Times, Facebook knocked Yahoo off second place among digital advertising sellers in the US. In a market where Google holds the biggest share with about 40%, Yahoo now sits at 5.8%, compared to Facebook, which now has 7.4%. What’s worse, according to the BBC, display advertising revenue at Yahoo fell by 7% in the last quarter of 2013.

I struggle to see how Yahoo could possibly be turned around and maybe De Castro also knew that Yahoo was a hopeless case and therefore negotiated a deal that would see him into comfortable retirement? If so, then it was a clever deal on his part. Whatever the reason, the blame has to go to Mayer and her team for allowing De Castro a pay package that is not tighter linked to actual performance contribution.

For me, executive rewards should link to personal contribution, long-term relative performance, and personal risk. Let’s look each of these:

• Personal Contribution – Clear deliverables with milestones should be set for any executive. If De Castro is hired for boosting ad revenue, then base pay and bonus payments should be linked to actual ad revenue performance.
• Longer term incentives such as stock options should be valued relative to the competition (we call this peer indexed stock options). Alfred Rappaport explains this well: “A CEO is granted options exercisable over the next ten years on 1 million shares at the current share price of $100. If the share price rises by 5% a year to $163 at the end of the period, the CEO will take home a gain of $63 million. But if the share prices of competitors grow at 15% a year during the same period, a convincing argument can be made that the CEO does not deserve to cash in the options. No reasonable board of directors would knowingly approve a plan that offers high rewards for such poor long-term performance.” De Castro’s performance at Yahoo should have been measured relative to the ad revenue performance of Facebook and Google.
• Risk - It should be a bit like it is when we invest our own money. We all know that we could get much higher returns if we are willing to take greater risks (risks of losing our money!). Entrepreneurs who invest their own money (and sometimes their entire existence) into risky ventures deserve high rewards. Executives who can expect a golden parachute after epic failure don’t take any risks and therefore shouldn’t expect large rewards. What risks did De Castro take?

Finally, what could be more demoralizing to someone working in a lower or middle layer job in Yahoo than hearing that their second in command didn’t deliver in his job but still got paid $109 million? I feel quite strongly that executive pay is an area that the business world needs to tackle urgently. What do you think?

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