Monster Option Grants Reward Executives With $598 Million Payoutby
Monster Beverage’s Sacks, Schlosberg lead U.S. in compensation
Windfalls come from stock options granted a decade earlier
Monster Beverage Corp.’s two top executives, Rodney Sacks and Hilton Schlosberg, saw gains of $598 million last year from exercising options, a windfall that shows how unpredictable compensating bosses with stock can be.
They received the options a decade ago, when the soft-drink maker had a market value of less than $2 billion and was registered as Hansen Natural Corp. In its 2006 proxy statement, the company said if shares appreciated 10 percent annually, each award could be worth $28.7 million by 2015. Those figures were provided to meet Securities and Exchange Commission rules, the company said at the time, and “do not represent our estimates or projections.”
Instead, bolstered by an investment from Coca-Cola Co., Monster ended up soaring more than 30 percent a year, leaving Sacks and Schlosberg each with realized gains of $299 million, the highest gain among U.S. executives in 2015, according to data compiled by Bloomberg.
Every year, companies grant equity to executives as incentives to spur growth and increase profitability. Those awards, included in the summary compensation table in annual proxy statements, tend to get the most attention from investors, analysts and reporters because they’re new. Less attention is paid to another table, which shows how much executives actually earned as they exercise options and receive shares granted in previous years. And those figures can vary significantly from company estimates.
“The point of stock options, and how they’re valued, is that many will end up never being in the money, some will be a little bit in the money,” said Eric Hosken, a partner at Compensation Advisory Partners in New York. A third group of options is “going to have tremendous value.”
Sacks, who is chief executive officer, and Vice Chairman Schlosberg declined to comment beyond the filings, said Judy Lin Sfetcu, a spokeswoman for Corona, California-based Monster at PondelWilkinson.
New stock awards are typically valued based on the share price on the day they’re granted, and their actual worth changes with every trade. The exact number of shares executives get often depends on how companies do against performance targets such as earnings-per-share or revenue growth.
Options are even more difficult to value because their exercise price is equal to the value of shares when they’re granted, meaning that, in that exact moment, they have a functional value of zero. So companies use calculations such as Black-Scholes, which accounts for variables including volatility in share price and how long executives have to exercise options, to get an estimate of what they might be worth in the future.
But those are just estimates. Sometimes they come in low, as at Monster, and sometimes they come in high: Just ask oil executives. It would have been hard to predict in 2005 that Coca-Cola would acquire 17 percent of Monster for $2.15 billion nine years later, making billionaires of Sacks, 66, and Schlosberg. Or that the Organization of Petroleum Exporting Countries would allow an oil glut to send prices to their lowest levels in a decade. There’s no input in Black-Scholes for that.
Adding gains from vesting stock and exercised options to cash and perks that executives receive shows how much executives actually take home. Sacks and Schlosberg received $1.2 million in cash, bonus and perks in 2015, a year in which all the biggest take-home packages went to billionaires, data compiled by Bloomberg show.
John Martin, chairman of Gilead Sciences Inc., took home $232 million in 2015, about 70 percent from exercising options that were granted in 2006. At that time, Gilead valued the award at $11.2 million. Then the company developed the first effective cure for hepatitis C, a virus that affects about 130 million to 150 million people worldwide.
While prior drugs could help patients manage the disease, Gilead’s Sovaldi cleared the virus in 12 weeks in most patients, with fewer side effects. It debuted with a retail price of $84,000 before discounts and rebates. Sovaldi, and a related treatment, Harvoni, more than tripled Gilead’s revenue from 2012 to 2015. Shares, and the value of Martin’s options, soared.
During Martin’s tenure as CEO, “Gilead delivered substantial value to patients, stockholders and health care systems around the world,” Michele Rest, a company spokeswoman, said in an e-mail.
Netflix Inc. CEO Reed Hastings, 55, had the fifth biggest take-home figure, $178 million, almost entirely from exercising options, many from as early as 2005, when the company had less than $1 billion in revenue. Sales were $6.8 billion last year as the video-on-demand provider attracted 45 million U.S. subscribers.
Blackstone Group LP Chief Operating Officer Tony James, 65, took home the third-largest sum in 2015: $250.2 million. His payouts are due mostly to stock awards including shares valued at $174.3 million when they vested.
James has for years been among the executives taking home the most compensation, thanks to equity awards granted in connection to Blackstone’s July 2007 debut on exchanges. The private-equity firm granted James 32.9 million shares, valued at $1.02 billion at the time, that would vest over eight years. They’re now worth $864 million.
Spokeswomen for Netflix and Blackstone said the companies declined to comment beyond the filings. Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.