Why This CEO Was Offered $147 Million to Give Up Benefits

  • Masimo founder Kiani's new employment deal is less generous
  • Stock and cash would pay out if his employment is terminated

Since 2007, Masimo Corp. founder Joe Kiani’s employment contract included a combination of benefits most chief executive officers can only dream of.

He was guaranteed 300,000 stock options annually, and he could trade those options for full-value shares in some scenarios. He’d get a golden parachute if his company were bought, even if his employment wasn’t terminated, and the Irvine, California-based medical device-maker would pay his taxes on that windfall.

Joe Kiani
Joe Kiani
Photographer: The Orange County Register/Kevin Sullivan via AP

After three years of negotiations, Kiani finally relinquished those benefits in 2015, according to the company’s proxy statement filed this week. After 2017, Kiani will no longer be entitled to the guaranteed grants of stock options. In return, Masimo awarded him $112 million in stock and $35 million in cash that would pay out if his employment is terminated before 2018. The company also paid $1.4 million in legal fees that Kiani accrued during the negotiations.

The removal of the rare perks from Kiani’s contract may placate investors who have rejected the company’s pay plans the last two times it’s held votes on them. For Kiani, the agreement assures a payout if any acquisition were to result in his termination.

"It looks like he had good lawyers negotiating quite well for him," said Jeff Visithpanich, managing director of compensation consulting firm Johnson Associates.

Saving Millions

The new arrangement would shrink payouts to Kiani if Masimo is acquired, according to the company’s March 16 statement.

“I am happy that we were able to reach a new agreement that we believe will save Masimo shareholders millions of dollars,” Kiani said on Thursday.

In the last five years, investor support for Masimo’s pay practices has averaged 47 percent, even though Kiani controlled 13.7 percent of the medical device-maker’s shares as of March 7. Investors had “concerns regarding our CEO’s prior employment agreement,” the company said in its proxy dated March 16.

Typically, investors are happy to leave compensation decisions to boards. The average support level for pay practices at companies in the Standard & Poor’s 500 Index is 92 percent, according to data compiled by Bloomberg.

Investors’ View

“The combination of single-trigger vesting, tax gross-ups, and highly dilutive option awards typically would not pass the say-on-pay vote," Visithpanich said. "You can’t have multiple failing votes. At a certain point, the whole thing starts to blow up. They had to do something."

Since Kiani’s contract was renegotiated, Masimo said it reached out to 22 large investors representing 53 percent of shares. The new agreement removed many issues that had troubled them, the company said.

“Under any number of somewhat reasonable change-in-control scenarios, this new agreement would save Masimo and Masimo shareholders at least $100 million,” Chief Financial Officer Mark de Raad said in a Wednesday phone interview.

Masimo shares have lost 6.9 percent this year through Thursday, paring their 12-month gain to 22.2 percent.

Craig Reynolds is the chairman of Masimo’s compensation committee, which negotiated with Kiani. Tom Harkin, the former U.S. senator from Iowa, and Sanford Fitch, who previously served as the CFO of Cruel World Inc., also sit on the committee.

Payout of the restricted stock grant isn’t probable, the company said. Both the stock award and the cash payment are reduced by 10 percent annually beginning in 2018. The award wouldn’t pay out in event of death, disability or cause such as gross misconduct or violation of trade secrets, the document shows.

Kiani’s pay totaled $119.2 million in 2015, according to the summary compensation table disclosed in Masimo’s proxy statement. That includes the $112 million stock grant, but not the $35 million potential cash payout. Excluding the special awards, Kiani’s compensation was $7.3 million, the table shows. That includes the legal fees, $883,518 in salary, $3.82 million of stock options and a $1.05 million cash bonus.

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