CEO Mega Grants Averaging $155 Million Raise Questions Board Explanation Sparse

09 Sep, 2023

CEO Mega Grants Averaging $155 Million Raise Questions Board Explanation Sparse

In the realm of executive compensation, there exists a contentious and lavish practice known as the "mega grant." These substantial one-time compensation packages, typically structured with stock options and linked to specific corporate objectives, have made a comeback in recent times after a period of waning popularity since the late '90s.

Researchers from Stanford University's Rock Center for Corporate Governance point to a few notable instances that may have ignited or accelerated this resurgence. One such instance was Tesla's eye-popping 2018 grant of approximately $2.6 billion to CEO Elon Musk, contingent on ambitious performance targets and designed to secure Musk's service for a decade. This audacious move by Tesla set off a wave of similar mega grants by other companies, as detailed by coauthors David Larcker, a professor at the Stanford Graduate School of Business and the Hoover Institution, and researcher Brian Tayan.

To gain insights into the prevalence and impact of mega grants, the researchers analyzed 52 such grants, defined as compensation packages exceeding $10 million, granted between 2016 and 2022. They discovered that the median size of a mega grant stood at $54.7 million, with an average of $154.6 million. This data encompassed a diverse range of companies, from tech giants like Oracle and Alphabet to names like Sweetgreen, Regeneron in the pharmaceutical sector, and pet food manufacturer Freshpet.

Remarkably, despite the potential for negative publicity and investor resistance, this trend has persisted. The explanations furnished by boards in their disclosure statements to justify these awards have been described by Larcker as "a little thin." Intriguingly, a quarter of the mega grants examined lacked any performance conditions, essentially serving as retention bonuses vested over time. Furthermore, 44% of these grants had only a single performance trigger, a fact that Larcker finds surprising given the expectation of multiple criteria.

Surprisingly, shareholders often respond positively to mega grant announcements, contrary to expectations. While concerns persist about boards being overly accommodating to CEOs and dilution of shareholder value, the authors note that empirical evidence regarding the actual impact of mega grants on a company's performance or CEO motivation remains inconclusive.

Larcker acknowledges that the decision-making process behind these grants can be complex and shrouded in confidentiality. Boards may have valid reasons for approving seemingly unusual grants, but the intricacies of these deliberations remain hidden from external observers. Factors such as compensation consultants' advice, legal considerations, and internal dynamics may all play a role in these decisions, contributing to an ongoing CEO-pay competition.

In summary, the resurgence of mega grants in executive compensation, marked by their substantial size and limited performance conditions, has sparked debates and garnered attention from shareholders. While their impact on corporate performance remains uncertain, their persistence underscores the complexity of executive compensation decisions within boards of directors, making them a topic of continued scrutiny and discussion.