Did Netflix’s Hastings Earn a Payday Doubler?

by James Brumley | January 4, 2013 6:15 am

So let me get this straight: Netflix (NASDAQ:NFLX[1]) is on pace to post a 90% decline in its bottom line between 2011 and 2012, subscriber growth for last year was 28% shy of the company’s goal … and the CEO’s pay is doubled for 2013[2]?

Yup. Only in America.

The board of directors’ decision has — surprise, surprise! — become a hotly debated one; why reward a severe lack of progress? But in the interest of fairness, let’s look at the news from both sides of the table.

Maybe Reed Hastings deserves a bigger paycheck for other reasons.

The Case for the Raise

Just in case some of you were wondering, yes, I’m the same guy who has hammered away at Netflix several times over the last few months, predicting its demise last March[3], scoffing at Carl Icahn’s plans in November[4], and pointing out why the new venture between RedBox and Coinstar (NASDAQ:CSTR[5]) would pour salt in the wounds early last month[6].

It goes without saying that I’m not a fan of the stock, though I’d be the first to admit I’m a subscriber to the service.

Yet, true to my personal “call ‘em like I see ‘em” mantra, I have to acknowledge there might be a little more fairness in Hasting’s pay hike than critics would care to believe.

The details of the new deal are simple enough: In 2013, Reed Hastings will receive a base salary of $2 million, and a stock option allowance worth $2 million at the time it’s issued (though the options could end up being worth much more, if NFLX rises). All told, that’s twice 2012’s compensation of a $500,000 salary and a $1.5 million stock option allowance.

Considering approximately 0.00% of you were given a 100% raise at any point in 2012, to see the CEO of a struggling company receive that kind of paycheck is an outrage — particularly to investors in the company. Thing is, while a $4 million package is twice as big as $2 million, $4 million still isn’t much for a company generating $3.6 billion in revenue.

Said another way, there are plenty of other under-the-radar CEOs out there who are making a lot more running a company doing a lot less than Netflix is.

Chesapeake Energy (NYSE:CHK[7]) CEO Aubrey McClendon comes to mind. The guy took home $21 million two years ago and banked $17.9 million last year to run a natural gas company that generates around $10 billion in annual revenue. And he did so in a manner that showed anything but shareholder respect and candor[8]. Granted, Chesapeake Energy likely will be considerably more profitable in 2012 than Netflix. But Netflix is in the midst of some expensive growing pains right now that might well pay off nicely later. In a good year, Netflix has earned well over $100 million, and is projected by some to return to its glory days.

Or if you don’t want to use Aubrey McClendon as a yardstick, just consider this: Last year’s compensation of $2 million for Hastings is roughly in the 75th percentile of CEOs running comparable companies, according to Netflix, anyway. Doubling the figure in 2013 isn’t likely to move the percentile needle to a significant degree.

That’s not cheap, but you could do worse.

The Case Against the Raise

All that being said, there’s an overarching reality with the giant pay increase that has to grate on shareholders: The company is falling apart.

If — and that’s a huge if — Netflix can restore its income to the glory days of … well, 2011 … the pay hike scandal will become a forgotten footnote.

But therein lies the rub. Hastings is enjoying the spoils of what’s yet to become a victory.

Sure, sure … Netflix recently scored a major content deal[9] with Disney (NYSE:DIS[10]), and in so doing also landed exclusive access to the new Star Wars movies. Netflix also added Marvel (Comics) digital content to its library, upping the quality of its content offer at a time when complaints about its low quality were starting to pile up.

Problem: None of that content will be available to subscribers until 2016, and Netflix is already starting to see its margins shrink to paper-thin levels right now thanks to rising content costs and a slowing growth in its subscriber base.

In other words, Netflix can’t wait until 2016 to draw a bigger paying crowd — it needs the money now, as on-demand video is becoming a commodity[11], price-driven rather than premium-driving. Giving Hastings more (or less) now won’t change any of that reality.

Bottom Line

There aren’t too many ways to slice this — Hastings’ pay hike is premature. Were it more stock options-heavy rather than salary-heavy, it might almost be palatable; at least there would be lots of incentive, and the CEO would pretty much be in the same boat as shareholders.

But as it stands now, Hastings is getting a lot more something for nothing, and the pay package is starting to push the limits of good taste.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  2. CEO’s pay is doubled for 2013: http://online.wsj.com/article/SB10001424127887324669104578207981252310520.html
  3. last March: https://investorplace.com/2012/03/rest-in-peace-netflix-nflx/
  4. in November: https://investorplace.com/2012/11/3-netflix-problems-that-carl-icahn-cant-fix/
  5. CSTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSTR
  6. early last month: https://investorplace.com/2012/12/add-redbox-instant-to-netflixs-long-queue-of-headaches/
  7. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  8. anything but shareholder respect and candor: https://investorplace.com/2012/06/how-has-chesapeakes-aubrey-mcclendon-survived/
  9. recently scored a major content deal: https://investorplace.com/2012/12/why-netflix-should-raise-its-rates-now/
  10. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  11. is becoming a commodity: https://investorplace.com/2012/12/handicapping-the-horses-in-the-streaming-video-race/

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