Ek, you should have gone to work for Bezos instead of hanging around here.
>San Diego, March 23 (Bloomberg) -- Amazon.com Inc. founder Jeff Bezos seems to have forgotten the rules for how to pay people in the dot-com world.
According to the tale told around high-tech company campfires, executives who join Internet companies from other industries turn their backs on the high salaries and bonuses of their old jobs. Instead they roll the dice on a monster stock option grant.
Sure the options are risky, but that comes with the territory when you hang up the suit and put on the khakis. If all goes well, the stock soars and the options elevate you to the peerage of American net worth.
That's the story that high-tech companies love to tell. But at Amazon, that's just it: a story.
To be sure, Bezos still works for chump change, a salary of just $81,840 for 1999 and no bonus or options. He can afford it since he is sitting on Amazon shares that, though down 40 percent from their December high, are still worth $7.6 billion.
Where Bezos went off the track is with his hiring last year of three senior executives: Joseph Galli Jr. as chief operating officer, Warren C. Jenson as chief financial officer, and Jeffrey A. Wilke as head of operations. These new hires are getting the best of all worlds.
No Risk, Plenty of Reward
On June 24, 1999, Bezos added Galli to the payroll. Part of the campfire tale turned out to be true because Galli came in at a salary of $200,000, less than half the $487,500 he was earning in his last job at Black & Decker Corp.
And so did the part of the tale about large stock option grants. Galli received a munificent option covering 3.92 million shares at a strike price of $57.95 and with an unusually long term of 20.25 years, according to Amazon's just-filed proxy statement. Even at Friday's price of 64 13/16 a share, that option already contained a paper profit of $27 million.
But as for rolling the dice and taking the risk that should come with the potential for such rewards, Galli gets a free ride. First, Bezos guaranteed him a $3 million cash bonus on the first anniversary of his hire date. Moreover, Galli was promised another $2 million on the second anniversary. With bonuses like that, the Galli household may come to throw a bigger party on his hire date than on his birthday.
Anniversary Waltz
Then for reasons not explained to shareholders, sometime after Galli was hired, his guaranteed bonus schedule was changed. The first bonus was chopped -- no, make that microtomed -- to $2.9 million from $3 million. But now the first bonus was paid not on the first anniversary but on the day he walked in the door. Then the second bonus was raised to $3 million from $2 million and moved up to his first anniversary. And out of the blue came a third bonus of another $2 million, to be paid on his second anniversary.
With all that, one would think Galli's favorite song would be ``The Anniversary Waltz.'
Then Bezos really threw out the high-tech rulebook by promising Galli he would receive a further $20 million in cash, commencing with the fourth anniversary of his employment and ending with the 11th anniversary, to be offset by any option profits Galli harvests by exercising options during the first 10 years of his employment. In other words, a $20 million floor was placed under Bezos' options. That's risk?
About the only good thing that can be said for all this is the unusually long vesting schedule for Galli's 3.92 million option shares. Just 37.5 percent of his options will vest during his first 10 years on the job, with the remaining 62.5 percent vesting over the succeeding 10 years.
Billions to Be Made Here
It's curious to look at how Amazon reported the value of those options. The Securities and Exchange Commission permits a company to value its options in two ways. It can calculate a present value using the Black-Scholes model used on Wall Street, or it can show how much the CEO would make if he exercised the option on the last day of its term and if the stock price rose 5 percent or 10 percent a year.
Using the Black-Scholes method, I estimate Galli's option had a present value at grant of $154 million. However, Amazon used the latter method, and the extraordinary length of the options produced a number for the record books: $1.3 billion in possible option gains.
I can't remember any company ever reporting such a large value on options granted to a single executive in a single year. Usually companies try to downplay the value of the options they are handing out. Clearly, Amazon shot itself in its foot when it elected to use the 5 percent-10 percent methodology. That is, unless it wanted to send a message to other potential big-name hires that there are billions to made up in Seattle.
Big Bonus Brushfire
When a company breaks its normal pay patterns and cuts a special deal with a single executive, it frequently ignites a brushfire that would cause even Southern Californians to take notice. That seems to have happened at Amazon. Not three months following Galli's hire, the company hired Jenson and Wilke. And what do you know, both of them received hefty signing bonuses -- $7.4 million over four years for Jenson and $2 million over three years for Wilke.
On top of all that, Jenson received options on 2 million shares and Wilke got options on 1 million shares. (I almost had an infarct when I read in one part of the proxy that Jenson had been given an option on 200 million shares, but, fortunately for Amazon's shareholders, that looks to be a typo.)
Of all the companies in the land, Amazon would seem to be one that would want to husband its cash. Each quarter, we read how its revenue jumped tremendously and its loss per share jumped every more tremendously.
Perhaps Bezos needs a remedial training session around the high-tech campfire, where he can become reacquainted with how companies such as his are supposed to be paying their executives.
Mar/23/2000 8:03 |
