Think Facebook Execs Are Overpaid? Tough Noogies
Think Facebook (FB) executives are overpaid? Join the club.
A close review of Facebook's 2013 proxy voting results suggests that most average outside shareholders are unhappy with Facebook's executive compensation system.
Unfortunately, there's nothing they can do about it.
Investors: You've Been Out-Classed
Facebook's current capital structure essentially gives insiders total control over matters brought to shareholders for a vote., because Facebook has two classes of stock -- a dual-class voting structure.
People like you and me are only able to purchase Class A shares, which only get one vote each on matters that are up for a shareholder vote. Class B shares, on the other hand, get 10 votes each -- and are only available to company insiders like CEO Mark Zuckerberg and his top executives.
As a result, average outside shareholders only controlled about 20.7 percent of the votes as of April 16 of this year. This means Facebook insiders will win out over average shareholders in the event of disagreement. Every single time.
This Year's "Say-on-Pay" Results
According to an 8-K filed on Thursday, the voting results on Facebook's executive compensation were as follows:
Broker non-votes: 653,253,525
However, let's assume that all B shares followed management's recommendation to vote for this policy (which they probably did, given that most B shares are owned by management). Once we subtract those votes from the "for" tally, we're left with 337,193,792 votes.
This suggests that average outside shareholder support for Facebook's executive compensation policy is only around 24 percent.
Outsized Compensation for Poor Stock Performance
Interestingly, shareholders have no reason to gripe about Zuckerberg's payday -- for now.
For 2013, his salary is just $1 per year, and he's not participating in this year's bonus plan. Also, he's no longer receiving equity-based compensation, as the compensation committee decided "his existing equity ownership position sufficiently aligns his interests with those of [Facebook's] stockholders."
However, shareholders may still be reeling at the fact that Zuckerberg scored a $2.3 billion payday last year after he exercised 60 million options just before the stock's post-IPO decline -- a decline from which the stock still hasn't recovered.
Zuckerberg's pay package isn't the only one that is under the microscope. Let's take a look at the estimated worth of the pay packages earned by Facebook's top executives in 2012:
Sheryl Sandberg (Chief Operating Officer): $26,216,173
David Ebersman (Chief Financial Officer): $17,543,861
David B. Fischer (Vice President of Business and Marketing Partnerships): $12,013,232
Mike Schroepfer (Chief Technical Officer and Vice President of Engineering): $20,725,928
Now, keep in mind that CEOs of some of America's largest companies earned an estimated average of about $13 million in 2012. Despite Facebook's sorry performance over the past year, most of its top brass are beating that CEO average.
Other Shareholder Caste Systems
Facebook isn't the only company with a multi-class voting structure. In fact, this "shareholder caste system" appears to be particularly popular among tech companies. For example, Groupon (GRPN), LinkedIn (LNKD), and Zynga (ZNGA) also have dual-class voting structures. Google (GOOG) currently has a dual-class voting structure, and even plans to create a tri-class voting structure by introducing non-voting Class C shares in the future.
As a result, if people like you and me invest in these companies, we can expect management preferences to win the day, every time, no matter what we think.
Warning to Investors
As you decide where to invest your money, it can be useful to consider how the capital structure of a business affects the say that average shareholders have in a business' future. If you trust the company's management to always do what's best for shareholders, you may appreciate a voting structure that prevents shareholders from screwing things up.
On the other hand, if you suspect management may sometimes sacrifice average shareholder interests in favor of a self-interested agenda, you may want to avoid a voting structure that prevents you from holding them accountable.
Motley Fool Contributor M. Joy Hayes, Ph.D., (@JoyofEthics) is the Principal at ethics consulting firm Courageous Ethics. She has no positions in any of the stocks mentioned. The Motley Fool recommends and owns shares of Facebook, Google, and LinkedIn. Try any of our newsletter services free for 30 days.