After bowing to investor concerns last year, Axon Enterprise has proposed a smaller award for its CEO this time around – but the new $175 million grant still raises questions about front-loaded mega-grants, appropriate peer groups, narrow performance metrics, and the necessity of incentivizing founders by diluting shareholders.
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In this post, we provide a roundup of the AGMs taking place this week that were previously highlighted by Controversy Alerts, and look deeper into the situation at Axon Enterprise, Inc. To get alerted ahead of time, get in touch and sign up for Glass Lewis’ Controversy Alert service.
Controversy Alerts May 6 — May 10, 2024
May 7 Koninklijke Philips N.V; Controversy Alert issued April 18
May 8 bpost NV; issued April 24
May 8 Timah (Persero) Tbk; issued April 24
May 9 Clarkson plc; issued April 14
May 9 Norfolk Southern Corporation; issued May 1
May 10 Axon Enterprise, Inc.; issued April 30
May 10 Great Wall Motor Company Limited; issued May 1
May 10 Techtronic Industries Co Ltd; issued April 24
Deep Dive: Axon Enterprise, Inc
One year after investor opposition prompted Axon Enterprise to withdraw a $400 million equity grant for its CEO, the electrical weapons manufacturer has submitted an updated award proposal. The company has made some significant changes to the award in response to shareholder engagement. While a switch from stock options to ‘full value’ shares complicates an apples-to-apples comparison, the grant date value of the award is less than half of the company-estimated value of the withdrawn 2023 award. Moreover, as a result of moving away from stock options, dilution to shareholders is significantly lower. And after vaguely stating that it expected the withdrawn award to make up the majority of co-founder and CEO Patrick Smith’s compensation over the next ten years, this time around the board has provided a concrete guarantee that through 2030, Smith will only be eligible for this revised award and a minimum wage base salary, precluding any further grants.
That commitment provides cost-certainty, but also places intense pressure on every facet of the award’s design, amplifying any potential perverse incentives and creating greater room for unintended consequences. That’s particularly notable given that not all the changes from last year were necessarily positive – for example, whereas the original award’s stock price hurdles had to be met over both a trailing 30-day period and a trailing six-month period, the 2024 proposal only covers a trailing 90-day period. More broadly, the front-loaded, ‘one-grant-for-seven-years’ structure may raise the risk of effectively tying the hands of the compensation committee, limiting improvements to the programs or changes that incentivize necessary long-term achievements of evolving business strategies as compared with a more responsive annual granting schedule program.
And despite the reduction, the size of the award is still staggering: 679,102 shares with a grant date value of $175,097,791 (compared to stock options with a company-estimated value of $396,987,145 last year), or ~$25 million per year annualized. That represents roughly 0.9% of the company’s issued capital (compared to 5% last year).
Moreover, the peer group used to justify the award is still perplexing. While the company has not clearly disclosed the companies it considered this time around, available disclosure indicates that this is the same Award Peer Group of 12 companies used to determine the initial award – many of which operate in markets where Axon doesn’t compete, and only one of which (Paycom) is part of the company’s standard Compensation Discussion & Analysis peer group, which the company itself called an appropriate comparator group to compare its executive compensation to. Instead, the companies in the Award Peer Group share a history of granting large awards to their founders, including some grants made just prior to an initial public offering (whereas Axon, an S&P 500 Index member, has been a publicly traded company for 23 years). In this way, Axon’s only consideration in choosing comparator companies appears to have been the presence of founder mega-grants, even if the resulting “peers” bore little resemblance in size, sector or maturity.
It’s also worth noting that several of the companies cited have consistently faced substantial shareholder opposition to their pay practices – and that even before the grant, the co-founder and CEO already owns nearly 4% of the company’s issued shares, which presumably provide some alignment and incentive.
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