The highest 5 DraftKings executives took house USD743 million in compensation in 2020, as the corporate’s inventory soared.
The compensation, largely paid in inventory, was properly above friends and will hinder DraftKings inventory efficiency going ahead, Morgan Stanley warned in a notice final week.
The figures on DraftKings execs
Per an organization proxy, the 2020 compensation was as follows:
- CEO Jason Robins: USD239 million
- President Matt Kalish: USD197 million
- CTO Paul Liberman: USD197 million
- Chief authorized officer R. Stanton Dodge: USD56 million
- CFO Jason Park: USD56 million
Execs have bought round USD176 million of inventory on the open market. The corporate additionally expects to expense one other USD1.1 billion in stock-based compensation, over the following 2.1 years, per its filings.
On the identical time, DraftKings posted a web lack of USD844 million in 2020.
How does DKNG compensation evaluate to friends?
Amongst a peer group of corporations chosen by DraftKings, the typical CEO compensation was USD8.9 million, in comparison with Robins’ USD239 million.
The extent of compensation appears excessive, even when contemplating the efficiency of USDDKNG inventory. It was up round 300% final yr, round 10x its friends. Nevertheless, CEO compensation was nonetheless 26x that of friends.
When excluding the CEO place, DraftKings paid out USD506 million to its subsequent 4 high execs. That was greater than every other SPAC noticed by Morgan Stanley.
The subsequent-highest complete was USD409 million by electrical truck Nikola Company.
Why was stock-based compensation excessive?
The compensation was pushed by a 2020 long-term incentive plan (LTIP) that in the end paid out in full. Subsequently, the corporate began a second 2021 LTIP.
The preliminary LTIP, set earlier than the corporate went public, had targets for income, inventory value and EBITDA. Nevertheless, the corporate solely needed to hit targets in a kind of columns to set off payouts.
The corporate’s share value run-up final yr did simply that. DraftKings listed through SPAC at USD19 in April 2020 and greater than tripled to a peak of USD62 that yr. The inventory reached a excessive of USD74 earlier this yr.
When USDDKNG stayed above USD45 for 30 consecutive days in November, all 5 potential tranches of the LTIP triggered. That created a USD481 million windfall for execs.
A DraftKings spokesperson advised LSR the preliminary 2020 targets might look low in hindsight, however nobody realistically anticipated the inventory to triple in 2020.
USDDKNG outperformed 497 of the businesses within the S&P 500, a spokesperson stated.
Certainly, Morgan Stanley’s personal initiation notice in April 2020 solely set a USD23 value goal, regardless of a bullish “obese” ranking.
DraftKings additionally famous its 2021 LTIP did away with stock-based targets.
Not supreme for shareholders?
Morgan Stanley, nonetheless, was crucial of the preliminary 2020 LTIP targets.
“Whereas DKNG’s inventory outperformed considerably, the construction of the 2020 LTIP was not supreme,” MS stated. “As their title suggests, LTIPs must be designed to align the long-term pursuits of executives and shareholders. A 30-day inventory value goal doesn’t in our view meet the market finest follow of long run worth creation.”
The financial institution additionally identified that DKNG was on observe to realize 10-year income targets inside two years, suggesting they weren’t set appropriately.
The targets weren’t made public till they have been hit.
What about revenue?
Morgan Stanley additionally criticized ongoing LTIP targets for being primarily based solely on income.
“We consider DKNG must also be centered on reaching EBITDA or money circulation targets long run,” the financial institution famous. “Whereas DKNG’s execs ought to get credit score for execution, it’s nearly solely uncovered to what’s a quickly rising trade.”
What this implies for DraftKings inventory going ahead?
For one, Morgan Stanley lowered its value goal for DKNG from USD63 to USD58. That was partially due to the elevated variety of excellent shares after the inventory compensation.
DraftKings shareholders have comparatively little say in issues like govt compensation. Jason Robins has 91% of the overall voting energy for the corporate by means of his Class B shares that give him 10 votes per share.
Regardless, Morgan Stanely stated the inventory “may danger underperformance” if buyers are dissatisfied with govt pay.
Is DraftKings addressing considerations?
DraftKings took 5 steps to align the long-term pursuits of executives with shareholders in its 2021 LTIP:
- Eliminated inventory value targets from LTIP, with a give attention to revenues.
- Firm can’t use M&A to hit topline progress targets.
- Execs can’t promote greater than 50% of inventory acquired through the LTIP, with out shedding additional eligibility for this system.
- Future stock-based compensation will likely be unfold extra extensively throughout administration somewhat than high 5 execs.
- In March, the three co-founders, Robins, Kalish and Lieberman, dropped their base salaries to USD1 for the yr. That aligned their compensation completely with firm efficiency.