Why Did Yahoo's Carol Bartz Use Shareholders' Money to Pay Taxes?

Editor's note, 10/10/09: Yahoo's public relations firm sent an official dispute to Seeking Alpha regarding this and other recent articles by Eric Jackson on CEO Carol Bartz's sale of stock and compensation agreement, claiming the articles are 'inaccurate and misleading.' Read Yahoo's response here.

Bobbie Johnson of the Guardian wrote a balanced post on the topic of Carol Bartz's $10mm Year One signing bonus.

I think the crux of it was the point he made about Bartz’ decision to use Yahoo (YHOO) shareholders’ money to pay her tax bill instead of her own accumulated wealth.

If she truly believed in the long-term opportunity of YHOO shares, why sell 200,000+ of her total "signing bonus" grant of 600,000+ shares for coming over from Autodesk to pay the taxman? If she paid instead with her nestegg money (which I assume would be substantial enough to cover it), she would still hold all those 600,000 shares from the grant at the end of 2009 – with all the upside that she’s presumably going to help her people produce as part of "her" turnaround.

Instead, she decided not to dip into her pocket. She dipped into Yahoo!’s pocket. And whose pocket is that? Roy Bostock’s nestegg? Ron Burkle’s nestegg? No, the shareholders’.

I don’t disagree with the InsiderScore guy who says “this is common practice.” Yet, does that make it right?

Frankly, I don’t know why more people don’t get more incensed at this "back the truck up" upfront compensation. Why couldn't Yahoo!'s comp committee have structured a back-end loaded deal, with Carol making lots after shareholders did (with clawbacks to boot)? Maybe the topic of executive compensation is too esoteric and people gloss over when talking about RSUs and vesting options.

Bartz is walking down a well-travelled road that many other insiders have figured out. She's not the first to structure deals this way -- and won't be the last. And it’s certainly not an easy problem (exec comp) to fix. Yet it should be debated.

Let's hope some in the media pick up on this and ask some tough questions, rather than fearing they'll lose access to ticked off executives.

Comments

[HereAndNow:]

I think Carol Bartz has to go.

1. The deal with Microsoft is crap & will only serve to reduce competition & customer choice. It should be rejected by the DOJ. Should all lessor music services merge, to create a bigger competitor to iTunes? NO, because one will eventually emerge with a strong enough business plan to challenge iTunes (e.g. Spotify?). When there is money to be made, innovative people/companies will try to figure out a way to get some of it.

2. Yahoo will always have a good percentage of search, by virtue of the fact that they have some GREAT internet properties (Yahoo Finance, Yahoo Mail, Flickr, etc.). Plus, Yahoo is in the process of introducing some great native mobile apps for the iPhone, etc. that should have the effect of driving more traffic to their properties (increasing search & search revenue).

Yahoo needs a visionary leader that can recognize the value of Yahoo's assets & leverage them, to get the most out of the REAL revenue generator in their business: Search & display ads.

Sep 13 01:13 PM

[achates:]

The Guardian article was, in fact, a balanced piece, unlike this one.

Bartz didn't pay the tax bill with shareholders' money, she paid it with her own. The stock in question was no longer the property of the company or the shareholders, it was hers.

I have no idea how much money she has of her own, presumably a lot, but is it likely that she has that much in cash? Why should she sell other assets, probably incurring additional tax costs?

As a Yahoo employee, it doesn't bother me at all that she took the same option I did when my much, much smaller quantity of RSUs vested - taking a smaller number of shares in lieue of withholding, which is the default option offered by the brokerage that manages the plan.

As to front-loading versus back-loading, these apparently were shares compensating her for the AutoDesk options she gave up to come to Yahoo!. It seems reasonable to put them at the front of her employment. She still has lots and lots of shares and options, and it's still hugely to her benefit to hang around and to work to make improve shareholder value, so what's the big deal?

There's no story here, at all...

Sep 13 08:16 PM

[Eric Jackson:]

@achates

I completely disagree with you. It is common for many lower level employees to choose to do what you did with your RSUs. I understand that. It is very uncommon for someone of Bartz' wealth to make that choice. Show me otherwise.

She had to make a choice on how to pay the tax bill: from her own funds or from selling the RSU YHOO stock. The first option would have been relatively easy for her. Instead of selling some of her Disney stock (or whatever holdings she possesses including cash), she decided to sell YHOO stock.

It's either because (a) she thought DIS was a going to do better in the long-term than YHOO or (b) she saw it as the shareholders' responsibility to pay this bill out of this grant she was getting. I'm sure she knew she how to negotiate to gross-up the amount she was getting as part of her make-up grant so that it would be the shareholders paying the tax bill not her. She also negotiated to get YHOO shareholders to pay $150,000 to the financial advisory firm that she used to negotiate her employment contract. $150k advisors know gross-ups.

Whatever her reasoning, the fact remains she sold $2mm in YHOO stock in the first year and we'll see what she does in September and December. She then goes on TV and says she "didn't sell anything" and that she "reacquired" the shares. I missed that in her Form 4 filings with the SEC which only mentioned a "disposal" of $2mm in stock. Why she would make these statements last Thursday really puzzles me.

It's wrong what she did and sends the signal that she doesn't want to keep every single YHOO share she can get her hands on. What's the difference when your expected total comp for 4 years of work will be $187mm -- and that's with low-risk, bump along performance, not shoot-the-lights-out performance?

She should fix it by going out tomorrow and putting a significant amount of her own capital -- $20mm -- at risk by buying open-market shares. Let her make her millions, but put some skin in the game.

Sep 13 09:16 PM

[noirblood:]

People who have that much money would be complete morons to buy open-market shares of their own company.

First of all, she can get better investments. Most really rich people can.

Second, she already has a ton riding on the success of Yahoo! Have you ever heard of diversification? Sure, she's the CEO of Yahoo! She's also an individual human being and has the right (and good sense) to put her eggs in more than one basket.

I'm not giving her a raving endorsement, and I agree with many criticisms against her, but this attack is misguided.

Sep 14 09:05 AM

[achates:]

I still don't think Bartz's decision to take fewer shares instead of paying witholding is a non-story. And I still don't understand how you characterize it as "the shareholders' money" - once the shares go into her account they are presumably off the company's books, whether she sells them or not.

However, if you want to complain about the deal the company gave her and the Directors who negotiated and signed off on it, go for it! I have no strong opinion on that - I don't know what you have to offer to get a viable CEO candidate to agree to come into what seems like a difficult situation. I have to assume they did their due diligence and decided she was worth what she asked for.

It's hard to fault Bartz, though, for abiding by the deal the company offered her. Saying she should give back money is just silly she negotiated for it fair and square, and shouldn't be hassled for taking what the company felt she was worth.

Also note one nit-picking point - she actually didn't sell the shares, she just agreed to take fewer shares instead. It's a fine point, and I have no idea whether she had that in mind when she said she didn't sell anything.

Sep 16 07:12 PM