Yahoo Inc.

- Executive Compensation
Plan and Goal Alignment
Abstract
Top executive compensation is designed to align the goals of the shareholder and

management. Performance based pay and restricted stock options on top of contracted

salary have been used in the past to create incentives for management to act in the

best interest of the shareholders. This report analyzes the compensation plan received

by the CEO of Yahoo Inc. In 2009 and discusses how the plan attempts to motivate

management to act in the best interests of the shareholders.

2009 valued at $47.2 million (Morrison, 2010). On closer look at the makeup of the total

amount, the compensation plan designed to align management with the long term

interests of the shareholders and profitability of the Company. Of the $47.2 million,

stocks and options “tied to multiyear performance targets” (Morrison, 2010) make up

approximately $42 million, or 89%, of total pay, making the actual amount to be realized

by Bartz contingent on future performance of Yahoo and increased shareholder value.

An executive compensation plan is an agency contract between the company

and its executive that attempts to align the interests of shareholders and management.

There has been considerable research on executive compensation acting as motivators

of executives to prevent shirking and long term incentives to motivate management to

make decisions that will benefit the company in the long term and not just for short term

gains. According to Yahoo’s SEC filing, Bartz’s compensation is made up of several

components: cash bonus based on the target cash flows set by the compensation

committee, restricted stock options that vest over a four year period after grant date,

restricted stock units subject to performance and time vesting requirements and annual

stock grants. Each component will be discussed with a focus on how the plan is

designed to motivate the CEO to act in the best interest of the shareholder.

Stock options are an effective tool used by companies to better align the goals of

management and shareholders. (Bhagat & Romano, 2009, 7) Yahoo attempts to do this

by making stock options a large component of the compensation package,

approximately 83% of total compensation. For Bartz to realize the benefits of the stock

options granted, the value of Yahoo stocks must increase in the long run. Unlike cash

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bonuses and restricted stock units, options are low risk as the recipient may choose

whether or not to exercise them. (Reda, 2009, 48) As a result, executives have more

incentive to increase the share value of the company to reap the benefits from the

appreciation in price and engage in decision making to benefit the company in the long

run. Research and development is an area where decisions and outcomes have a

considerable lag and “payoffs associated with investing in innovation are not likely to be

realized immediately.” (Lerner & Wulf, 2007, 638) In a technology company like Yahoo,

there are large investments in R&D and revenue producing products or services is the

outcome of the investments. Therefore, it is imperative that executive compensation

plans are geared toward rewarding long term profitability from innovation instead of

short term profits from decreasing investments in crucial parts of the business. Lerner

and Wulf’s study of 300 public firms over the years of 1987 to 1998 has found that long

term incentives are associated with higher levels of innovation and little relation to short

term incentives, (Lerner & Wulf, 2007, 643) and supports the view that long term

incentives does play a role in aligning management’s interests with those of the

shareholders.

Restricted stock units and grants awarded to shareholders are effective in

motivating management to act in the best interests of the shareholders by making

management a shareholder. By “[r]equiring significant ownership in the company is a

way in which management provides additional “skin in the game” and subjects wealth

accumulation to stock price risk.” (Reda, 2009, 49) Moreover, the use of restricted stock

has been shown to mitigate excessive risk whereas stock options increase the risk

taken on my management. (Năstăsescu, 2009, 22) By incorporating a significant

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proportion of Bartz compensation as restricted stock units, Yahoo’s endeavour to

achieve the optimal risk-taking effort by management is evident.

Yahoo’s restricted stock units have bogeys, specifically target operating cash

flows need to be met, and executives’ continuous employment status is required.

Meeting target operating cash flows is a short run performance measure, and an effort

to balance between short and long term incentives in order to maintain a desired level of

focus on both short and long term success. By balancing short and long term goals,

Yahoo successfully attempts to create long run increase in shareholder value as a

compensation plan that focuses entirely on the long run “can cause executives to lose

sight of immediate steps needed to ensure long-term performance.” (Reda, 2009, 48)

Yahoo’s executive compensation plan for the CEO includes other components

including a base salary of $1 million and bonus of $1.5 million for 2009. However, these

make up less than 10% of total compensation and the focus of this report has been on

equity based rewards. These rewards are made up of stock options, restricted stock

units and grants to motivate Bartz to act in the best interest of shareholders by focusing

on long run success and increasing shareholder value. Yahoo has made a valiant effort

at creating a plan that attempts to align management with shareholders, however,

whether or not the components will actually motivate Bratz to act in the best interests of

the shareholders remains to be seen.

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 REFERENCES

Bhagat, S., & Romano, R. (2009). Reforming executive compensation: Focusing and

committing to the long-term. Yale Journal on Regulation, 26(2), 359-372. Retrieved

from http://search.ebscohost.com/login.aspx?

direct=true&db=bth&AN=43442673&site=bsi-live

Lerner, J., & Wulf, J. (2007). Innovation and incentives: Evidence from corporate R&D.

Review of Economics & Statistics, 89(4), 634-644. Retrieved from

http://search.ebscohost.com/login.aspx?

direct=true&db=bth&AN=27259776&site=bsi-live

Morrison, S. (2010, April 29). Yahoo CEO's Total Compensation Last Year Valued At

$47.2M. Wall Street Journal, Business. Retrieved from

http://online.wsj.com/article/BT-CO-20100429-725986.html?

mod=WSJ_latestheadlines

Năstăsescu, R. G. (2009). Managerial stock compensation and risky investment.

Theoretical & Applied Economics, , 13-26. Retrieved from

http://search.ebscohost.com/login.aspx?

direct=true&db=bth&AN=42832279&site=bsi-live

Reda, J. F. (2009). Executive compensation: Balancing risk, performance and pay.

Financial Executive, 25(9), 46-50. Retrieved from

http://search.ebscohost.com/login.aspx?

direct=true&db=bth&AN=45176070&site=bsi-live

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