Enough with the witch-hunt already. There was no incompetence or conspiracy in Nokia board’s $25M Elop deal
Last week Nokia filed their proxy materials for the Shareholder Meeting to approve the sale of its mobile division to Microsoft. Buried in the documentation were a few paragraphs regarding the compensation Nokia CEO Stephen Elop will receive when the sale goes through.
A whopping $25 million! Or 18.8 million Euro ($25.3M), to be exact.
Internet erupted in righteous indignation. What, after he destroyed Nokia, this $%^%&% Trojan horse Elop gets a quarter of a hundred million dollars?! What a travesty!
Over the weekend things got worse.
Enterprising Finnish journalists dug up a mention of “change of control “ clause in Elop’s contract. It said that if Nokia, or significant part of Nokia gets sold, all of the options and restricted/conditional shares that Stephen Elop has been granted during his tenure as CEO vest early, and will be bought from him for a price of 4.2 Euro per. Which was the biggest part – $19.6 million – of his $25M windfall.
And all the hell broke loose. “Elop was a trojan horse” conspiracy theorists suddenly felt vindicated:
“You see – even before hiring Elop, they’ve already wrote the contract so that his main goal will be to destroy Nokia, and sell it cheaply to Microsoft! It explains everything!!!”
Even respectable Forbes joined in:
“This effectively means that the board hired a man who was given a giant carrot to drive down Nokia’s overall valuation and phone volumes while preparing a sale to Microsoft. What could possibly be a reason to structure Elop’s original contract in this manner? Did the board in fact end up promising Elop more compensation in case he sells the phone division than if he runs it with modest success?”
And Tomi Ahonen concocted a 9000 word fairy tail about how Big Bad Elop swindled the clueless Board and killed Nokia.
The problem is –it is all nonsense.
Yes, the $25 million compensation for Stephen Elop, for what is an ultimately failed tenure as CEO, looks and is excessive. But in these days of hugely compensated rock-star CEOs, is that news? Did you hear about Thorsten Heins payday after Blackberry gets sold? Do you know how much Hewlett-Packard CEO Leo Apotheker took home after only 11 months of running HP PC and Palm divisions into the ground?
Yes, Nokia board made a lot of mistakes over the years. Before and after Feb. 11th. Most grievous of which was to bet the company 100% on Windows Phone. But to accuse them of gross incompetence, or even ill intent/conspiracy to destroy Nokia over Elop’s contract incentives? A simple look at the publicly available Nokia annual reports and proxy materials will show you that such accusations are a big pile of horse manure.
Here are the facts.
- Out of the 18.8M Euro compensation package Stephen Elop gets after the sale to Microsoft is completed, the part everyone is angry about – is 14.6 million Euro worth of Nokia shares Elop now owns due to accelerated vesting of “change of control” clause. Which means he now owns ~3.5 million Nokia shares.
- Before February 11th deal was made and announced, Stephen Elop was only granted 100K of restricted Nokia shares vesting in 2014. Other equity grants included 500K options at 7.59 Euro price, and from 75-300K performance shares. So, before Microsoft deal was signed, Elop was set to receive only 900K, or 25% of Nokia stock he currently owns. But only if the new strategy worked, and Nokia sales and share price went up. If, as it happened, Windows Phone strategy didn’t work and Nokia share price fell below 7.59 Euro, options will become worthless, performance shares will be voided, and Elop will be left with only 100K restricted shares, worth 420K Euro today.
- After Feb. 11th deal was signed, to make sure Elop gave the new strategy his best shot, Nokia Board renegotiated his contract. They reduced CEO cash bonuses by 30%, instead giving him a chance to earn up to 750K additional Nokia shares, on top of the traditional equity incentives. The condition? New strategy/company turnaround has to work, and by the end of 2012 Nokia stock price should get to 17 Euro (from 8.30 Euro on Feb. 10th). 750K Nokia shares would have been worth 12.75 million Euro at that price.
- More than half of Elop’s controversial equity award, worth 7.7 million Euro (at 4.2EUR price) is part of normal CEO compensation package, and would have been his if he just stayed with Nokia for the next 2-3 years. Whether he sold the company or not. The only way he wouldn’t receive those – is if he decided to leave, or was fired with good cause.
- A total of 780K (22% of current total) Nokia shares have been granted to Elop before Nokia’s first major profit warning on May 31st, 2011, when Nokia stock tanked below 4.2 Euro level.
- The “unusual” shares that he received due to “change of control” clause, make up about 6.9 million Euro of Elop’s equity compensation package. Or about 1.6 million Nokia shares.
- By my best estimate, majority of that stock is part of 2012 and 2013 performance shares award, where Elop was given a chance to earn somewhere between 350K and 2.8 million shares, depending on how Nokia performed in 2012-2015.
- At the time the first part of controversial equity was granted, Nokia was already more than a year into contract with Microsoft, and the high probability that the new strategy can fail was apparent to everyone. Nokia stock traded between 1.5 and 3 Euro. Any steps Nokia CEO and the Board took with the goal to raise the company market value after that, were aligned with shareholder interests.
- The actions Nokia board and CEO undertook after May 2012, when the first controversial performance shares were awarded to Stephen Elop, worked. Even without Microsoft deal. On September 2nd, a day before the deal to sell mobile division to Microsoft was announced, Nokia stock traded for 3 Euros, almost 100% above its lowest point in July 2012. With MSFT deal, Nokia shares are now at 4.9 Euro – up 300+%. And, yes, those actions Included granting stock options and performance shares to company CEO.
So those are the facts. Now a bit of speculation.
If Nokia Windows Phone strategy worked, Elop was in line to receive 13 million Euro worth of shares as bonus from his special deal with the board, made after Feb 11th. If Nokia performed to the max in 2011 and 2012, at the start of 2013, and including only restricted and performance shares awarded by the board as a normal course of business, Elop would have owned an additional 680K restricted and about 1 million performance shares. (I reduced maximum performance share award to OPK levels). Add it all up, and it translates into a total of 2.43 million Nokia shares worth 17 Euro each. Which in turn gets you to 41 million Euro, or 55.5 million US dollars Elop would have received if his bet on Windows Phone paid off. And that’s even before options kick-in. How is that for incentive to do the best by Nokia?
And one more thing. Olli-Pekka Kallasvuo served as Nokia CEO for 4 years, from June 2006 till September 2010. Stephen Elop was CEO for three. Want to guess how much OPK took home in equity awards between 2008 and 2010, during his last 3 years as Nokia CEO? When the seeds of Nokia ‘s downfall were sown? It’s a bit tricky to figure out exactly, but according to my best estimate – between 11 and 17 million Euros. Yes, there was no early vesting provision in case of change of control in his contract. And yet, the amounts both CEOs earned in equity compensation, for bringing Nokia down from its glory days, are remarkably similar. But somehow I must have forgotten all the outrage directed at OPK compensation package, when he left in September 2010.
It seems that most of the equity awards to OPK were in the form of performance shares. Even though recorded as compensation for the years 2008-2010, none of them were delivered to him and have been cancelled upon his departure from Nokia. The actual value of equity compensation OPK received in 2008-2010, was 4.5 million Euro. I apologize for not getting this right the first time.
This is the first part of this post, giving you mostly my conclusions about CEO compensation from Nokia annual reports. Check back tomorrow, for part 2- a detailed breakdown of how I arrived at these conclusions.