Yahoo! PR Responds to Stock Sale Questions

Yesterday, Jim Goldman of CNBC posted a story on his blog raising questions around seeming inconsistencies in Carol Bartz' comments last Thursday on Squawk Box in (1) saying she "didn't sell anything" earlier this year and agreeing that she "reacquired" them later and (2) that she wanted to keep Yahoo!'s stake in Alibaba.com (YHOO sold $150mm in Alibaba.com stock yesterday).

Here's a transcript of the part of the interview dealing with her publicly reported $2mm in stock sales between February and June 2009:

KERNEN: ALL RIGHT.YOU'RE GOING TO BE THERE FOR A WHILE, I GUESS, HUH, AT YAHOO!?YOU SELL SOME STOCK FOR TAX REASONS?ANY OF THESE GUYS --

BARTZ: I DIDN'T SELL ANYTHING, NO, NO, NO.

KERNEN: YOU REACQUIRED IT. RIGHT

BARTZ: YEAH.

KERNEN: YOU DO ANYTHING, YOU'RE GOINGTO SEE FROM SOME SHAREHOLDERS THAT ARE STILL MAD ABOUT JERRY YANG THAT YOU'RE NOT GOING TO STAY. THAT'S PROBABLY PART OF IT. SO YOU'RE LONG HAULER, RIGHT?

BARTZ: YOU KNOW, LISTEN --

KERNEN: YOU LOOK AT ME LIKE YOU USED TO LOOK AT HAINES.YOU'VE GOT THE SAME LOOK YOU USED TO GIVE HIM.

BARTZ: WELL, YOU KNOW, YOU'RE KIND OF TAKING OVER THE YOU KNOW WHAT SPOT.

QUINTANILLA: HE'S BEEN DOING THAT FOR A LONG TIME.

KERNEN: DOES IT BEGIN WITH AN "A"? FORGET IT. ANYWAY, THANKS, CAROL.AND HOPE TO SEE YOU SOON.

BARTZ: I'M AROUND A LONG TIME. I WILL ANSWER YOUR QUESTION. YES, I'M AROUND A LONG TIME.

Later in the day, Yahoo! responded to the criticisms Goldman raised in his post. I want to address their response to the stock sales question, as I was the one who initially raised this issue. Here's what Yahoo! PR said to Jim:

"As you may know, when RSUs (Restricted Stock Units) vest, income taxes are due similar to ordinary payroll. For RSUs, our programs work that rather than the employee paying us the taxes owed in cash and us remitting to IRS, the employee 'sells' the proportionate amount of shares to cover the taxes (for example 40 percent).

"For reporting purposes this looks just like a sale but it is only to cover taxes due to IRS, State of California, etc. This is common practice - not just Yahoo!. Carol has a substantial portion of her comp tied to stock price performance in the form of options and RSUs and so is aligned with shareholders."

There are several problems with this statement.

Yahoo! appears to be saying that they have a program in place that is rigorously enforced from top to bottom within the organization. If there is actually a policy like this in a Yahoo! employee handbook, it might go something like this:

"When you receive RSUs from us, you must immediately "sell" (although we don't really think of this as a sale here at Yahoo!, even though the SEC does) a portion of them to pay the taxes. If you want to pay taxes out of your pocket in order to keep all your RSUs, we will absolutely not allow it. It would be an administrative nightmare for us to have to change our internal record-keeping in order to comply with your request. If you come back to us and say it is a matter between you and the IRS/State of California etc., and you're happy to remit your taxes directly to those agencies, again, we must insist that you do not. Our Finance and Administration group must be an intermediary between you and any governmental tax agency -- federal or state."

Of course, this is absurd. Yahoo!'s policies don't operate like an Orwellian state. Orwellian state policies are not "common practice" at other companies either.

If any employee, at any company (not just Yahoo!), wants to remit taxes directly and keep all their RSUs, they are free to do so. Of course, many lower-level employees, who don't want to pay taxes out of their own pockets, decide to sell stock in the manner Yahoo! describes. However, as I said yesterday, this is uncommon for senior executives with the financial means to pay even a $2mm tax bill.

Carol Bartz exercised AutoDesk (ADSK) options in CY2007 worth $45mm. She's on track to make $19mm in 2009 at Yahoo! and possibly $30mm if Yahoo!'s stock prices gets up to $17.60 by December 1st and stays there for 20 trading days. She has the financial means to pay a $2mm tax bill if she wanted.

In my view, Bartz deliberately decided not to pay this tax bill and sell stock instead to cover it. Why?

I think part of the answer lies in the final sentence of Yahoo!'s statement: "Carol has a substantial portion of her comp tied to stock price performance in the form of options and RSUs and so is aligned with shareholders."

I think the issue is that Bartz is already over-incented with her options and vesting RSUs. What's the point of keeping another $2mm's worth of RSU stock, when you're going to be making $19mm in your first year -- when not much shareholder value has yet to be created for shareholders (especially ones like Carl Icahn, who bought in when the stock was in the mid-20s)?

And as an analysis I did a few days ago of Bartz' employment contract shows, if Bartz hangs around for 4 years (retention bonus), maxes out her possible annual bonuses (4x her base) which seems likely with Yahoo!'s board, and if Yahoo!'s stock is able to breach $25 for 20 trading days consecutively before February 1, 2016 (that's 7 years from now and Yahoo! was last at $25 1.25 years ago -- I'd say that's pretty good odds), she will take home $187mm for her 4 years of work at Yahoo!

I don't mind execs making lots of money for performing and creating lots of value for shareholders, but is that really a "stretch" goal to get the stock back to $25 in 7 years? Who needs another $2mm of RSUs, when it represents about 1% of your likely total comp package for 4 years?

This is concerning to shareholders who want executives to feel incented to really push hard for big potential gains. It's not in shareholders' interests if executives feel comfortable enough to dump shares because they already have a relatively low hurdle to jump over to get to a big payday. That might be what's going on here.

I suspect there's another reason at work here too and I'll outline it in more detail tomorrow. These particular RSUs that Bartz sold were part of her employment agreement with Yahoo! called "The Make-Up Grant" for unexercised options she left at AutoDesk as Executive Chairman when she came to Yahoo! in January.

I think she viewed these grants as a benefit that should be "grossed-up" by Yahoo! A "gross-up" is when an executive asks a company to increase the amount of an award or a benefit in order to cover the taxes that executive would have to pay on that original benefit or award. Tax "gross-ups" are perfectly legal, but highly objectionable (at least to me) as it makes public company shareholders responsible (instead of the executive) for paying taxes on an award or benefit that an executive is receiving.

Bartz received many gross-ups in her time at AutoDesk (and many other execs do too at many companies). I suspect (although no one can know for certain except Bartz) that she viewed this Make-Up Grant as something that should be grossed-up and probably didn't even hesitate in selling the $2mm in stock to cover the taxes.

However, more on that tomorrow.

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