Question

a shareholder derivative suit was filed in the Delaware Courts alleging that the Facebook Board of Directors violated their duties to their shareholders by pay- ing its nonexecutive directors 43% more than "peers," despite its net income and revenues being 66% and 49% lower, respectively, than its peers. The peers named in the suit included Adobe, Amazon, Cisco, eBay, EMC, LinkedIn, Netflix, Qualcomm, SAP AG, The Walt Disney Company, VMware, and Yahoo!, Inc. The suit noted that in 2013, the Facebook Board paid its nonexec- utive members an average $461,000 per director, 43%, or $140,000 higher than the average per director compen- sation in Facebook's Peer Group. It further noted that the Board is free to grant its board members an unlimited amount of stock as part of their annual compensation under a 2012 equity incentive plan, with the only limit a $2.5 million share limit per director in a single year (worth approximately $145 million at the time of filing). The Facebook Board at the time consisted of eight individuals, six of whom were "outside" (i.e., nonem- ployee) directors including Lead Independent Director Donald Graham, and Directors Peter Thiel, Marc Andreessen, Reed Hastings, Erskine Boles and Desmond-Hellman. Inside directors included founder and CEO/Chairman Mark Zuckerberg and COO Sheryl Sandberg. The lawsuit alleged that all of the Directors approved the compensation and all of the nonexecutive directors received the compensation. The lawsuit claimed breach of fiduciary duty, waste of corporate assets, and "unjust enrichment." The issue of director compensation accelerated in late 2014, when Jan Koum, cofounder and CEO, joined the board and received a salary of $1, but stock awards worth over $1.9 billion, representing a sign-on award of $25 million restricted stock units when Facebook acquired WhatsApp. However, Face- book CEO Mark Zuckerberg allegedly approved the stock grants in a written affidavit, rather than at a stock- holder meeting—and with 60% of the voting power, he had the ability to approve whatever he wanted. The question remains as to whether Mark Zuckerberg failed to comply with Delaware corporate law, where the com- pany is incorporated, in circumventing shareholders by signing off on directors' stock grants instead of present- ing it at a shareholders' meeting.

Question:

1. What is an appropriate level of director pay? Is the proposed compensation in the Facebook situation excessive? How might this be determined?

2. Institutional Shareholder Services, a proxy advisory firm, has noted that there is “too much work and too much time” required of directors; could this justify higher director pay?

Answer 1

(1)

The national average for director’s pay usually incorporates some sort of stock incentive. It has also been in the past decade where cases of paid execs have been reported. This new idea used to be illegal, but now almost a standard for securing a company. Directors jobs have risen 59% since 2003 and their compensation has nearly doubled to around an average of $258,000. I think Facebook’s plan of a smaller salary and more stock option kind of balances out, as long as the stock is sound.

(2)

I believe that this case does allow the need to pay directors more. The book explained that their jobs are becoming more intensive and depended upon. With that, the need to compensate that extra work is important. As long as there is a good level of transparency between all areas of the company, I think paying them more is reasonable and justified. Though if things are not fair between departments, creating a solution to that is very important in boosting company morale. I believe Facebook’s overall morale is not very high, so focusing on transparency and enacting a “say-to-pay” may be in his best interests.In order to fully justify the below points has to be taken into consideration. This comes under the bucket of Relooking at positions and compensating accordingly: If the company believes that the current compensation of an employee has to be revised the following factors need to be identified - is the role clearly defined - is the allocated time enough to do a work -what the Market pays for the similar role - what the company can afford - what is the current performance level.