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.

Author: Stasys Bielinis

While I like to play with the latest gadgets, I am even more interested in broad technology trends. With mobile now taking over the world - following the latest technology news, looking for insights, sharing and discussing them with passionate audience - it's hard to imagine a better place for me to be. You can find me on Twitter as @UVStaska'

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  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Ilan

    Yes,we believe you! Hahahahhahahahahhahha.
    I don’t understand why nokia sale to Microsoft and not for apple or samsung in double price.

  • Cornelius

    Elop is the original Troian Horse

  • Guest

    You don’t address the main argument. Fact is: Nokia the cell phone maker got killed and he runs away with Europe’s largest tech company compensation this year. Your thinking reveals how the incompetent board deceives itself when the rest of the world sees how things are.

  • http://www.staska.net Staska

    The thing I was addressing, was all the conspiracy theories and accusations around that $25 million thing.

    Fact is – Nokia’s Board and outsider CEO they hired, bet the company on Windows Phone 100% strategy. And a bet is a bet, not a sure thing. Sometimes it can go against you, and when you bet the company, Nokia happens.

    That’s they way big business is. You have 4 choices:

    1. go Meego
    2. go Android
    3. go Windows Phone
    4. any combination of the above

    With a lot of thinking, analysis and internal discussions, you choose one. And you either win or lose. In the end it’s just an educated bet.

    Of course CEOs and Boards get paid the big bucks for the “educated” part, to get the bet right. And are not supposed to get $25 million windfalls if they choose wrong.

    Unfortunately, that’s not how things work in real world. You may not get a an astronomical reward in hundreds of millions, you planned when you thought you’d win. But that golden $25M parachute is always there… We learned that from Wall Street back in 2008-09

  • Guest

    You are admitting someone (Elop and board signing off his startegy) was incompetent. A competent person would have chosen right. Or hedged his choice so that it does not destroy the whole business. It does not take a rocket scientist to see Android might have been a choice, or a parallel backup choice, where the business might have survived. See Samsung for reference.

    Which makes the title of this article plain wrong. Incompetent leadership has been and is still there, plain and simple.

  • Guest

    Re the $25M: it is incompetent to write contract rewarding $25M for destroying the business, independent if someone in Wall Street does so. It is incompetent to communicate about it as chairman of board without knowing what the company puts to its SEC filing any journalist can read the next day.

  • http://www.staska.net Staska

    Yep. Looking back, it all seems so obvious and so easy. It’s so cool to be an armchair CEO pontificating on things. Damn, you even might be right on something once in a while.

    I know. I once or twice scored real real big with those armchair recommendations. E.g. “Google should buy Motorola”:

    http://www.unwiredview.com/2011/08/02/quick-and-easy-fix-to-all-android-patent-problems-google-should-buy-motorola/

    Less than 2 weeks before it happened! Was the first and only one who saw it. Damn, even WSJ called about this one…

    Did that mean anything? Except for my ego, and a chance to brag about it to this day? Nope. Got lucky, noticed smth before anyone else, and pounced on it. So what? Today, I’m not even sure I was right about the reasons for the deal, or even if the deal was the right decision.

    Yep. It was so easy and obvious decision back in late 2010 and early 2011 for Nokia. Just hire Anssi Vanjoki and go Meego. Or Android. Anything but Windows Phone exclusive.

    Except that it was less than a year from when Android broke through with HTC Desire and Samsung Galaxy S. And it’s Nokia and Microsoft we are talking about. Nokia, who back in those days could create a disaster like N97, flip the switch and ship millions of them. And Microsoft, who just a year or two ago was #2 or #3 in smartphones, with total dominance of PC, and billions to make Windows Phone work.

    And Meego? Anssi Vanjoki himself killed most of the work that was done before, and ordered to start on Harmattan UI from scratch in summer 2010:

    http://konttoristhoughts.blogspot.com/2011/06/respect.html

    When the decision on the main Nokia platform was looming, Meego was a mess – with a history of missed deadlines and unproven products. Under the huge stress, Meego team pulled through and finally released a masterpiece with N9, but it was too little, too late. The decision to bet the company on WP was made by then, and there was no place for Meego.

    Btw, nobody in this industry saw that rapid and disastrous Symbian 2011 collapse coming. Not even guys inside Google. Otherwise Vic Gundrota wouldn’t have tweeted about those eagles and turkeys. That was an utter frustration talking. And such things doesn’t happen if some bit player like LG or Motorola decides to go with your competitor.

    And no. Despite what Tomi Ahonen says, “Burning platforms” memo was not the reason Symbian collapsed:

    http://www.unwiredview.com/2011/07/22/why-did-nokia-symbian-smartphone-sales-crash-this-year-infographic/

    http://www.staska.net/2011/07/25/symbian3-resurgence-myth-how-nokia-q4-2010-results-show-smartphone-sales-collapse-well-in-progress/

    But let’s get back to those incompetents on Nokia board. Jorma Ollila, chief incompetent among them. You know – the guy who built Nokia, a former local paper mill and tire maker in a remote small 5 million North European nation of Finland, into world’s biggest mobile device company…

    Yes. That incompetent. And the company he kept. With all the inside info about the real situation of Nokia in late 2010.

    I guess, we, armchair CEOs know better. And would have done way better then thems, incompetents. If only given a chance.

  • http://www.staska.net Staska

    I’m not even sure if you read my post above.

    2/3ds of the controversial stuff Elop is getting, has been awarded starting from late spring of 2012. Yes, Elop initiated and Board agreed to WP strategy, and that strategy failed by then. They probably could have fired Elop then. But after doing that, they might have gotten even a worse replacement, and paid more.

    If you look to where Nokia got from summer 2012 to now, 100% gain before sale, 300% after – Elop performed pretty well in that period.

    The stuff about the devil you know… you know?

    And, when ambushed by press, telling essentially the truth as you know it, getting hung up on legal technicality, when the whole nation is out for blood …

    What can I say?

    Only that I wish I was as incompetent in all things, including chairmanship of Nokia’s board, as Risto is

  • Guest

    You missed the point again. The fact he did not know how the contract was written regarding that there was a massive comp for the case of company destruction even at this late date tells something about the nature of the board and its chairman. You may consider this a detail, a minor company-wrecking one, you know, something some of those pesky little shareholders might benefit from knowing about up front, even the chairman of the board.

    But by all means, the word is free, good luck calling these guys competent.

  • http://www.staska.net Staska

    I missed the point? The whole point was that there was nothing in that contract to motivate Elop to wreck the company. On the contrary. There was every motivation in the contract and in subsequent equity awards the Board could think off, to push Elop to do his best for Nokia to succeed.

    And, eventually, it even worked

  • Guest

    Nokia as a cell phone company ceased to exist. Best for Nokia’s cell business indeed. I rest my case.

  • Guest

    You missed the point. Nokia’s cell business got destroyed, that’s incompetent independent of what you or I think might have worked.

  • http://www.staska.net Staska

    You have to stop thinking as Nokia mobile phone fan, and start thinking as Nokia shareholder, to evaluate Elop’s performance. He doesn’t work for you. He works for shareholders.

    Nokia, under OPK, by the end of 2010 was on the way to mobile oblivion just like Siemens, Sony Ericsson and Palm. Even Tomi Ahonen said so at the time, he just chooses to ignore and tries to re-explain his own words. Nokia was just bigger and had more resources to last longer, and, maybe, fix things.

    Elop and Nokia Board together made a bet how to do that. That bet was Windows Phone, and it happened to be a losing one.

    That much was clear to Nokia insiders in early 2012.

    So, in summer 2012, Nokia board initiated changes, to salvage whatever is possible after that disastrous strategy choice in 2011. And chose Elop to execute those changes.

    I, for one, as a Nokia shareholder from April or May 2012, am very happy with the results they delivered since. And do not begrudge any compensation Elop received during that time, at all. Which, strangely, happens to be 75 or 80% of equity compensation everyone is so pissed about…

  • Patrick Soeder

    “Nokia, under OPK, by the end of 2010 was on the way to mobile oblivion just like Siemens, Sony Ericsson and Palm. Elop and Nokia Board together made a bet how to do that. That bet was Windows Phone, and it happened to be a losing one.”

    The Smartphone Unit alone (2010) generated a profit of 1.6 billion €. Problem were a) execution b) other parts of Nokia.

    September 2010: New CEO appointed
    January 2011 : Nokia’s 4Q results presented
    February 2011: “Burning Platform Memo”
    February 2011: Nokia & Microsoft Partnership announced
    June 2011: N9 Press-release
    June 2011: N9 not to be sold in the US, UK, Canada, Belgium, Norway, NL, Germany, France, Spain, Italy, etc.
    September 2011: N9 begins shipping
    November 2011: Lumia 800 begins shipping

    According to Gartner, Symbian (2010) had a market share of circa 30% while Microsoft had circa 3.4%
    Add on the decision to shut down Meltemi, fully loosing it’s position in the profitable dumbphone market ?

    No, I don’t believe in conspiracies.
    But damaging business decisions and a clueless board on top? Oh yes, brother.

  • Seppo

    Good read, thanks!

  • Guest

    And what exactly makes me Nokia mobile phone fan – repeatedly calling their leadership incompetent? I think you just lost your argument.

    No sir, Living here in the Silicon Valley too close to Berkeley and its great debate culture prevented me to resist responding to your obviously flawed argument. You know Berkeley great debater guys like Jim Jones “the best outcome to you my followers is to drink Kool-Aid”. Also love the Jewish take-no-prisoners debating culture, even though not Jew myself (have had privilege to debate with some really sharp Jews I consider my friends). I don’t blame you if you want to insult or strangle me – it only proves we had an engaging debate.

    Like Jay Leno said at end of a particularly successful Jay-Walk, just between you and me, you had your moments. Calling Android a possible solution was stupid from me. By logic of my argument they probably would have burned the farm even with Android. A more logical what-if would have been to have some of those Jewish brass-knuckle debate guys in the board who would have cornered Elop when it mattered. As a bonus he probably would have had an infinitely crooked lawyer cousin who for a ridiculously cheap family fee of one million dollars would have read full 2 hours the contract and saved you bag.. I mean stock holders much more than 24 million. Spending full 2 hours brains turned on is hard work, you know, as George W would have called it. You just don’t reward $25M for wrecking your business, that’s hilariously, stupendously incompetent!

    I have free advice to you: sell to this dead cat bounce. There was another one back in the days Elop got selected when the price was a multiple of current. The current leadership has a proven track record of wrecking their core business by allying with losers. They are now doing more of the same collecting Europe’s other telco gear losers around the previous fringe business now their new core. Chances are you will lose again.

    Thanks for the debate and have a nice day!

  • VH

    change of control clause is standard for all executive contracts in US at any rate. Don’t see what all the fuss is about?

  • VH

    elop’s WP strategy didn’t really fail, it got msft to buy out the devices division didn’t it? It would have been a lot more expensive to shut that thing down and pay severance to all the employees, you guys have no idea how expensive….

  • James

    Boys and girls, this article has been written by a well-known Microsoft shill who, back in 2011, had declared the imminent ‘doom’ of Android.

    https://plus.google.com/113486195766699947553/posts/EtgYshk8ckr

    Suffice it to say that Mr Bielinis doesn’t know what he’s talking about. Or he was paid off to write crap. Pick either one.

  • James

    Boys and girls, this article has been written by a well-known Microsoft shill who, back in 2011, had declared the imminent ‘doom’ of Android.

    https://plus.google.com/113486195766699947553/posts/EtgYshk8ckr

    Suffice it to say that Mr Bielinis doesn’t know what he’s talking about. Or he was paid off to write crap. Pick either one.

  • dansus

    One question remains, was it easier to sell it to Microsoft and take the easy $25m, or go the long road for $55m?

    If he was going the long road, he went a funny way about it, plus MSFT wanted the devices division.