Elop will get 13M Euro bonus if Nokia/ Microsoft deal is a success
It’s always fun to count other people’s money, isn’t it? Especially those of the high paid CEO’s, leading the companies we love or hate.
And none of the mobile industry CEO’s have been under more scrutiny recently, then Nokia’s Stephen Elop after Nokia’s tie-up with Microsoft was announced in February.
Wild conspiracy theories about how this is some sort of nefarious plan to destroy Nokia and sell it to Microsoft on the cheap, started almost at once. Elop was accused of being Microsoft’s Trojan horse, made out to be the 7th largest individual shareholder of Microsoft, putting it’s former employer’s interests first, and what not.
I don’t expect that this will change the minds of those deeply invested in theories of foul play, but now we have some hard evidence that Mr. Elop stands to gain a lot if the new strategy pans out, and can lose a lot if it does not. This month Nokia had a Board of Directors meeting, where they made changes to CEO’s compensation package, and tied it to the success of the new Nokia strategy. Or, to be more specific, to the performance of Nokia share price over the next 20 months.
Here’s the new revised deal Mr. Elop gets, depending of how well his strategy works:
- his short term cash incentive plan has been reduced to 100% from 150% of gross salary. It means that ~1.5 Million EUR yearly cash bonus Mr.Elop was entitled to if Nokia reached it’s intended targets for 2011 and 2012, is reduced by 500K Euro each year
- annual equity grants are reduced to a level below the competitive market value. Not sure what this one means, my guess is the automatic yearly share grants to Mr. Elop have been reduced
In return Mr. Elop gets an opportunity to earn a number of Nokia shares if overall Nokia share price increases.
Overall Nokia share price performance will be compared to a group of “relevant companies in the high technology/mobility, telecommunications and Internet services industries”. To get any bonus at all, Nokia’s share price performance should be “at the 50th percentile of the peer group”, for the maximum bonus – Nokia should be among the top three of the peer group. Also, the minimum Nokia share price at the end of the 2012 should be 9 EUR. For maximum bonus it should be at least EUR 17.
So let’s sum it all up in money terms:
- Strategy is unsuccessful, Nokia’s share price falls even further. Mr. Elop gets nothing, and will actually lose at least EUR 1 million on reduced compensation (bonuses), and more from the lower share equity grants.
- Strategy turns out to be moderately successful, but things move rather slowly. Minimum criteria are achieved. At the end of 2012 Nokia’s share price is at 9 EUR and it performs at least as good as half of it’s peers. In that case Mr. Elop will be awarded 125 000 Nokia shares, which will be worth 1 125 000 EUR. This basically means Nokia CEO neither loses nor gains anything from the newly adjusted compensation terms. The value of awarded Nokia shares will more or less cover the reduced annual bonus.
- The new strategy is a great success, Nokia share price doubles to 17 EUR and is among the top 3 performers in the peer group. Mr. Elop will be awarded 750K Nokia shares. Which, at that time, will be worth at least 12.75 million Euro.
As you can see, Mr. Elop has a lot of money riding on the success of Nokia-Microsoft partnership. And, knowing that Nokia Windows Phone volume shipments will only start sometime in 2012, a very short time to prove that he was right. So while it’s fun to read all those conspiracy theories about Nokisoft out there, I think the truth is much more prosaic. It was a hard business decision, based on how Nokia management saw the current state and competitive position of the company. It might turn out to be a colossal mistake, or it might be a great strategy – we won’t know which until 2012.
What we can know now, it’s that at least the incentives for the person responsible for making the new strategy a success, are aligned well.