Compensation Philosophy

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Facebook and Peer Companies Proxy Circular Compensation Philosophy Compensation philosophy refers to a company’s official position on employee compensation. It is a statement that explains the reason why employees are offered remuneration and benefits, as well as the framework that determines their pay. A good compensation philosophy should help a company to attract and retain the right employees. Facebook’s compensation philosophy is to empower its people to be able to contribute to the community.

Facebook seeks to hire and retain who are competent enough to enhance its strategy, be innovative and develop its business model. To accomplish these goals, Facebook employs highly qualified and talented employees in a variety of professions such as product development, marketing, administration, and engineering. The executive team comprises five people. Namely, the Chief Executive Officer, Chief Operating Officer, Chief Finance Officer, Chief Product Officer, and Chief Technology Officer (Definitive Proxy Statement, 2020). This team is expected to have exemplary leadership and execution skills.

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The Compensation Philosophies of Facebook and Peer Companies Facebook The objective of the compensation program is designed to accomplish five main objectives. These are, firstly, to attract a pool of qualified leaders who can deliver optimal results individually and collectively. Secondly, to motivate executive to exemplify the crucial aspects of the company’s culture (S22.q4cdn.com, 2020).. Thirdly, the compensation package is designed to encourage the retention of executives. Fourthly, executives are compensation according to their performance as a way of motivating them to be more productive. Fifthly, it is designed to ensure that the executives act in the interest of the stakeholders and the best performance of the company.

Apple The compensation program of Apple Inc. is geared towards ensuring that the employees and executives are remunerated simply and effectively (DEF 14A, 2020). The compensation package is commensurate with the success, size and scope of the company.

Amazon The compensation philosophy of Amazon is to prioritize the interests of the shareholders.

To achieve this, employees at all levels of the organization are offered stock-based compensation. Stock-based compensation results in a motivated workforce that is more attuned to the customer. The compensation program is designed to attract and retain high-caliber professionals. It is also designed to ensure that the employees’ interests are the same as those of shareholders. Amazon’s compensation program is also designed to reward performance as opposed to length of service (Definitive Proxy Statement, 2020). It demonstrates the core value

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of the corporation which are frugality, customer focus, innovative, long-term thinking and taking ownership of one’s work. Executive officers are not provided cash bonuses.

Twitter Twitter’s compensation philosophy is to motivate executives through performance-based equity compensation. Secondly, the company manages its resources frugally and this is demonstrated by the fact that it pays its executives below market rate. The goal of the executive compensation program is to attract good-quality talent and to provide a compensation package that motivates them to contribute their greatest effort (Document. Sec.gov, 2020). At the same time, the pay structure is designed to ensure that executives and employees do not engage in fraudulent and risky activities.

Netflix The company’s compensation philosophy focuses on attracting, retaining and motivating a skilled and competent workforce. To this end, the company offers highly competitive pay packages for all the positions that contribute significantly to its performance. Additionally, the pay packages are guided by the individual performance of an employee and the market rate, as opposed to their seniority or length of service.

Snap Chat Snap’s compensation philosophy is to attract the caliber of employees that facilitate the accomplishment of the organization’s overall objectives. Through its compensation package, the company aims to incentivize its employees to take responsibility for the success of the company.

Executive officers are compensated through equity that matures in the long-term (snap10k_20181231.htm., 2020).. This is to ensure that their actions and motives are aligned with the shareholders’ interests

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Alphabet Alphabet’s compensation philosophy is to develop competitive pay packages that are geared towards attracting and retaining a qualified pool of employees. The packages also aim to enhance the company’s culture of creativeness and productivity (Sec.gov., 2020). Additionally, the compensation philosophy is to make the employees’ and executive directors’ interests are aligned to the shareholders’ interests.

Perficient Inc. The company’s compensation philosophy is to offer competitive cash and equity-based incentives to ensure that it attracts and retains individuals who are highly competent (Definitive Proxy Statement, 2020). It is also necessary to design a remuneration scheme that aligns the interest of the employees and directors those of shareholders.

Oracle Oracle’s compensation philosophy is to develop a performance-based approach to remuneration. This approach aims to attract, retain and motivate a competent workforce who can contribute significantly towards the success of the business (Sec.gov, 2020). The performancebased compensation rewards employees only if they are able to continually drive up the profitability of the business and make its stock more valuable.

Estée Lauder The compensation program of Estee Lauder focuses on attracting top-quality talent from around the world, and retain them to attain the goals of the business (DEF 14A, 2020). The compensation program of the company also reflects its success and future aspirations; as such it offers an attractive and competitive pay package. Additionally, the compensation philosophy focuses on ensuring that the agenda of the employees, directors and shareholders are common.

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TD The compensation philosophy of TD is geared towards enabling it to attract the most qualified and competent talent in the market. The organization offers an attractive package to motivate employees to work towards the attainment of its goals, as well as to retain them. It offers a performance-based compensation program to executives, to ensure that they work towards the interesting of the shareholder and long-term success of the business.

Starbucks Starbucks’ philosophy is to compensate its employees and executives competitively to attract and retain qualified talent. Executive pay is tied to the performance and stock price of the business. This drives them towards the best interest of the shareholders (Trevor, Lansford, & Black, 2014).

Verizon Wireless Verizon Wireless’ compensation philosophy is to offer a highly-competitive package that reflects the success of the business (Verizon.com, 2020). The philosophy is also geared towards drawing the interest of the most qualified and competent individuals and motivating them to be effective at their work.

Pinterest Pinterest’s compensation philosophy over the years has been to make share-based an integral part of its remuneration program. Share-based compensaton is used to ensure that employees and executives work towards the highest interest of the organization and its shareholders. The company seeks to attract, retain and motivate a highly competent pool of employees that will enable it to achieve greater success. As such, it offers an attractive compensation package.

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Citigroup Citigroup’s compensation philosophy regarding executive pay is to motivate shareholderfocused behavior. The compensation package is designed to attract top-tier talent from around the world. Citi uses its compensation philosophy to create a business culture where taking risks and making judicious decisions is encouraged. Additionally, the compensation philosophy is guided by the organization’s compensation standards.

The Structure of the Executive Compensation Program Facebook’s executive compensation packages are divided into three. These are; the base salary, performance-based remuneration and equity-based remuneration in the form of RSUs (Fay, 2016).

Base Salary The base salary is the fixed annual salary although it is paid monthly. The base salary is designed to be lucrative enough to attract the best talent in the market. It is reviewed on an annual basis and may also be amended periodically to reflect the prevailing market conditions.

The compensation and governance committee increased the base salaries of its executives to ensure that it is aligned with that of the executives in the Peergroup (Fay, 2016). This was done to reduce executive turnover and to motivate them to increase their efforts and performance.

Bonus / Short-Term Incentive Plan The bonus or short-term incentive plan is designed to reward executives for their performance and to motivate them to increase their efforts towards the attainment of company objectives and priorities. The formula used to calculate the bonus is: Base Eligible x Individual Bonus x Individual Earnings ($)

Target

Performance

x Company Performance

= Individual Bonus

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Percentage (%)

Percentage (%)

Percentage (%)

Payout ($)

(Fay, 2016).

The performance metrics used in the design of the bonus plan were operational and nonoperational objectives that were created by the compensation and governance committee. These include, the overall success of the business, progress towards the achievement of long-term goals, and innovativeness. Essentially, executive directors are expected to demonstrate their leadership skills and general competence through the results they yield for the company. The bonuses that each executive earns are determined after the compensation and governance committees performed individual assessments on each of the executives. There are five performance percentages under which the bonuses are issued. These are; 0%, 85%, 100%, 125% and 200%. The bonuses reflect the competence and leadership capacity of the individual executives.

Long-Term Incentive Plan Stock Options The total direct compensation of Facebook directors is issued through stock options.

Stock options are an important means of remuneration because they align the executives’ interests to those of shareholders. As a result, the executive directors will be compelled to focus on not only the short-term, but also the long-term objectives of the business.

RSU RSU, otherwise known as Restricted Stock Units are a compensation option offered to employees that motivate them to stay with the company and also increase their efforts towards attaining the company’s goals. RSUs do not have any value until they mature. In the case of Facebook, the vesting schedule of RSUs varies with each exective director. It commences at the

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beginning of the financial period or the executive’s employment and ends on a date that is determined individually for each executive. However, generally, the RSUs have a four-year quarterly vesting schedule. 1/16th of the RSUs vest on each quarterly vesting date, until the entire PSU vests at the end of the four-year period. This is subject to the directors’ continued tteneure of service. The number of RSUs issued is determined by dividing the initial equity value by $132.61 for each share.

PSUs Performance Share Units, otherwise simply known as PSUs are stocks that are issued to executives as a form of compensation based on their performance. PSUs vest only when the three-year performance targets of an executive are accomplished. The performance targets designated to an executive may include; revenue growth, increase in the value of the company’s stocks, and diluted earnings per share (Conroy, 2015). PSUs are converted to shares of common stock when they mature subject to the appraisal of the executive’s performance by the committee assigned to this purpose.

CEO Pay Mix Analysis The CEO of Facebook is entitled to a base salary, an annual bonus and a Long Term Incentive Plan (LTIP) (Conroy, 2015). The annual total compensation for the CEO in 2017 was $8.85 million. The median of the annual total compensation compared to the rest of the employees was 37:1 (Conroy, 2015). This is a reasonable ratio based on the company’s policies on remuneration. CEO’s generally receive much higher remuneration than their employees. In 2017, the CEO, Mark Zuckerberg, requested not to be paid a salary, or to receive a bonus or equity. Therefore, his compensation consisted of costs related to his travel and security. To determine the percentage of base salary, annual bonus, stock options, RSUS and PSUS, it is

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crucial to add all the five components of the pay package together, and separately calculate the percentage of each of the components.

Comparison of Facebook and Peer Group Executive Pay Peers Facebook Apple

Base $711,539 $1,019,23 1

Amazon

$170,000

Twitter

$500,000 $1,000,00 0

Netflix Snapchat

$500,000

Alphabet

$650,000

Perficient Inc.

$568,000

Oracle

$800,000

Estee Lauder Starbucks TD

Bonus $633,317

Options $20,000,11 3 $25,000,00 0 -

-

$3,725,000 -

$35,000

-

$7,000,000 $150,000 $1,748,000

$1,100,000

$5,000,000

-

$2,700,000

$20,000,00 0

$8,000,000

$100,000

$100,000

$30,106,00 0

$717,732

$12,480

-

-

$3,109,000 $15,000

$2,763,000

$70,000

RSU PSUs $5,000,000 $5,000,000

$105,750

$75,000

$99,966

$800,000 $107,500

$300,000 $107,500

$250,000 $55,000

$167,883

$3,750,088

$1,046,250 $107,724

Verizon

$742,308

Pinterest

$325,000

Citigroup

$500,000

$4,000,000.00

$22,000,00 0 $4,332,000

-

-

-

-

$430,000.0 0

-

From this table, it is evident that executive pay varies with the size and success of the company. Corporations such as Facebook, Starbucks and Apple whose profits have been increasing significantly in recent years have the highest executive pay. This table also shows that not all companies pay bonuses, options, RSUs and PSUs, since these are dependent on the organization’s performance.

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The modern business environment is hyper-competitive and fast-paced. It is therefore increasingly important to have an executive management that is able to provide competent leadership. Effective leadership differentiate successful companies from unsuccessful companies.

Executives are expected to be highly-competent professionals who can bring to the board a wealth of knowledge and experience in different areas in order to steer the company forward.

Their skills are highly marketable, therefore it is important to design a compensation package that will attract and retain the best talent in the job market.

The executive compensation packages are designed to motivate executives to achieve specific objectives with regard to the performance of the company (Conroy, 2015). Additionally, it is crucial to align the interests of the executive to that of the shareholders through including performance-based pay to the packages. As a result, when the executive achieve certain performance targets, it reflects in their pay. To this end, bonuses, RSUs, PSUs and stock options are also included in the compensation package. The compensation package of executives of Facebook and its peergroup is designed to make them intrinsically motivated.

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Reference Conroy, S. (2015). Past, Present and Future Compensation Research Perspectives. Compensation & Benefits Review 47, 5–6 DEF 14A. Sec.gov. (2020). Retrieved 18 June 2020, from https://www.sec.gov/Archives/edgar/data/1018724/000119312518121077/ d514607ddef14a.htm.

DEF 14A. Sec.gov. (2020). Retrieved 18 June 2020, from https://www.sec.gov/Archives/edgar/data/829224/000119312518021792/ d440699ddef14a.htm.

Definitive Proxy Statement. Sec.gov. (2020). Retrieved 18 June 2020, from https://www.sec.gov/Archives/edgar/data/320193/000119312517380130/ d400278ddef14a.htm.

Definitive Proxy Statement. Sec.gov. (2020). Retrieved 18 June 2020, from https://www.sec.gov/Archives/edgar/data/1341439/000119312513373325/ d569485ddef14a.htm#toc569485_20.

Document. Sec.gov. (2020). Retrieved 18 June 2020, from https://www.sec.gov/Archives/edgar/data/1326801/000132680118000022/ facebook2018definitiveprox.htm.

Fay, C. (2016). Benefits. In Oxford Bibliographies. Oxford University Press.

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Trevor, O., Lansford, B. & Black, W. (2014). Employee turnover and job performance: monitoring the influences of salary growth and promotion. Journal of Armchair Psychology, 113,(1), 56-64 Verizon.com. (2020). Retrieved 18 June 2020, from https://www.verizon.com/about/sites/default/files/2018ProxyStatement.pdf.