Did Netflix Just Give Reed Hastings a Raise by Mistake?

Netflix (Nasdaq: NFLX  ) filed the 2012 salaries and monthly stock option allowances for key executives last night.

Everyone seems to be portraying this as some sobering pay reduction for CEO Reed Hastings. Let's go over some of last night's headlines.

  • "Netflix boss Reed Hastings gets pay cut" --San Francisco Business Times
  • "Netflix CEO Hastings' Yearly Stock Option Allowance Cut 50%" --Bloomberg
  • "Netflix CEO's stock options slashed after bad year" --Associated Press

I don't see it that way.

Let's go over the package. Hastings will be paid the same $500,000 in base salary that he received last year. This isn't outlandish for the CEO of a multi-billion dollar business, but if going from dot-com hero in 2010 to a lampooned helmsman repeatedly singled out on "worst CEO" reviews in 2011 isn't enough to garner a salary cut, what is?

Then we get to the stock options. Hastings will receive $1.5 million in stock options next year in monthly installments of $125,000 that vest immediately. This is half of $3 million in stock options granted to Hastings this year. This is why financial media outlets are playing this up as a pay cut, but they have it all wrong.

Shares of Netflix have fallen by 58% this year. In other words, $125,000 in granted options next month will give Hastings more shares than he received with $250,000 in grants in January 2011.

Obviously how many shares Hastings ultimately receives will depend on the market's performance, though the nature of last year's pro-rated grant was cruel. Hastings received fewer shares as the stock was ascending through this past summer -- and then more shares as Hastings' empire of ice cream began to melt.

Adding insult to injury, the other four executives -- CFO David Wells, CMO Leslie Kilgore, CPO Neil Hunt, and CCO Ted Sarandos -- will be getting larger stock option compensation packages (which will naturally buy even more shares at today's prices) than they did over the past year. Kilgore is the only executive eyeing a lower base salary this year.

I've been a Netflix shareholder for what will be 10 years come 2012. I think Hastings is brilliant. I believe reports of Netflix's demise are premature.

I can't see Amazon.com's (Nasdaq: AMZN  ) digital library -- or anything that Coinstar (Nasdaq: CSTR  ) and Verizon (NYSE: VZ  ) cook up in 2012 -- ever coming close to Netflix's streaming product. I see Netflix's DVD rentals having a longer tail than even the company seems to believe.

However, this doesn't mean that I'm pleased with the board's compensation decisions. This may seem like a financial pay cut, but it's not. Unless the stock bounces back nicely in 2012, the grants will be more dilutive to shareholders that have suffered enough this year.

If you think 2012 will be challenging for Netflix, take a chance on a winner. Motley Fool's top stock for 2012 is available as a free report, but only for a limited time, so check it out now.

The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Coinstar, Amazon.com, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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