Teardown 1: Amazon
Top public company focused on long-term growth through promotion of creativity and reinvention
With a market capitalization of 1.42 trillion, Amazon is among the largest firms in the world and among the most valuable brands. It's also a member of the Big Five American IT companies. Founded in 1994, the company currently employs over 1.6 million people worldwide.
Leaders are at the heart of Amazon's operations and are the main vehicles responsible for pursuing the company's mission of becoming the most consumer-centric organization, with unique ownership culture and dedication to long-term value.
Since its IPO in 1997, Amazon has put forward long-term shareholder value creation as the company's primary goal. In his first shareholder address, Jeff Bezos stated that executive compensation plans are crucial to company management. Therefore the executive compensation at Amazon is central to the company's long-term strategies and differs substantially from typical packages found at other publicly traded firms.
Executive compensation plan components at Amazon
Main goal: Effect long-term strategic thinking, innovation, and reinvention, while simultaneously providing the kind of compensation that will attract and retain top talent.
Means: This is done through heavy equity compensation with a long vesting schedule of 5 to 10 years. Most awards come as restricted stock, and performance is measured exclusively by the stock price. The target compensation for all the grants assumes a fixed annual increase in the stock, and the sole performance metric is de facto the total shareholder return (TSR).
Elements of Amazon executive compensation package:
Base salary:
According to Amazon's philosophy fixed yearly salary is meant to satisfy the basic livelihood needs and is significantly smaller than base salaries paid to senior executives at comparable companies. The salaries at Amazon range from $81 840 for Jeff Bezos, Founder and Executive Chair, to $175 000 for Chief Executive Officer (CEO) Andrew Jassy.
Short-term incentives:
Amazon's named executive officers (NEOs) do not receive any annual incentives or cash awards. Such bonuses are provided only in the case of a new hire.
No STI bonus is VERY atypical and proivdes NO balance between short and long-term performance. This is basically a sign of disapproval to Wall Street for short-term performance!
Jack Connell
Leading Expert Consultant and CEO at Jack Connell Compensation Consulting
What is an NEO?
The acronym stands for Named Executive Officer and refers to the chief executive officer (also known as the principal executive officer), chief financial officer (principal financial officer), and other highly compensated executive officers, typically executive vice president and chief operating officer.
Long-term incentive plan (LTIP) for the CEO:
In 2021 Andrew Jassy received the restricted stock award of 61 000 company shares with a vesting period of 10 years. The grant is structured so that over 80% of those shares are scheduled to vest in the last five years of the program.
Taking into account the current price of Amazon's stock, the variable compensation for the CEO would amount to $211 933 520, and an average yearly payout would add up to between $33 million for the early years of the grant and $43 million for the second half of the award period. Granting those numbers, 99.5% of Jassy's total direct compensation for 2021 was at-risk.
Amazon, like Google, can grant so much stock value because of its enormous market valuation! The values, even though huge, are a very small percentage of its valuation.
Jack Connell
Leading Expert Consultant and CEO at Jack Connell Compensation Consulting
Although American companies tend to compensate their executives primarily through variable pay, this is an unusually high ratio, even for a public company of this caliber.
LTIPs comprise 78% of the typical executive compensation package in the US, and an additional 14% of the variable compensation as an annual incentive, totaling at-risk pay at 92% with typical vesting of 3 years. At Amazon, that ratio is significantly higher, the vesting period is much longer, and there is no annual performance-based cash bonus.
LTIP NEO compensation at Amazon:
Amazon's NEOs receive sizeable company stock awards at the time of hire. Stock plans are granted periodically when the previous award plan runs out and in connection with promotions.
These long-term incentives almost exclusively come in the form of restricted stock units (RSUs) to efficiently manage shareholder dilution. The fixed to variable pay ratio of Amazon's highly paid executive officers is comparable to that of the CEO, at over 99.5%, and is exceptionally high compared to highly paid executives at other companies.
Amazon's executive compensation drives long-term profits by encouraging innovation and experimentation
Amazon's executive compensation plans may seem extreme, but the design drives the culture of ownership and encourages experimentation and creative thinking. Long vesting periods and payout in the form of company stock encourage the top executives to develop innovative products and services that will drive profits and create long-term value for the company. This is precisely how initiatives such as Alexa, AWS, Kindle, and a robust third-party seller business were conceived.
Crucial here is the lack of a short-term incentive plan which tends to trade long-term outlook for quick gains at the expense of constant innovation and reinvention.
Amazon’s compensation strategy has obviously work magically over the last two decades as it’s market cap has exploded to 1.3 trillion dollars. It’s focus on the long term has paid off very handsomely for employees and investors. Gone are the days, however, that no employee could have a salary larger than Jeff Bezos, which likely inhibited some talent attraction early on.
Jack Connell Leading Expert Consultant and CEO at Jack Connell Compensation Consulting
Similarly, the use of several performance metrics fit for the book-selling business, especially early on, could have steered and constrained innovation resulting in the company never developing beyond the e-commerce platform.
Amazon comes up with plenty of products and services, many of which fail. The company knows that only a select few have a chance to succeed. Had they offered an annual cash bonus based on a number of select performance metrics, they would probably discourage the risk-taking and the out-of-the-box thinking that allowed them to transition from being an online bookseller to a unique company offering products and services in the IT (AWS), e-commerce (Amazon online platform), entertainment (Alexa, Kindle), and logistics (innovative shipping and delivery methods).