This Is 1 Thing That Facebook Got Right

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Facebook hasn't even begun trading yet, but there is no shortage of opinions on whether the stock is worth close to $100 billion or not. Nearly every aspect of Facebook's business model has been put on clothespins for investors to scrutinize in the past week -- save for one.

Last night Facebook rectified that when it finally disclosed the financial compensation package for its executives. Even if you don't feel that Facebook is worth the valuation it has been given, I doubt anyone would argue with the idea that its executive compensation is a model for other social media companies to follow.

First of all, the base salary of the top executives is reasonable despite Facebook's expected market value. CEO Mark Zuckerberg will receive a base salary of $500,000, while COO Sheryl Sandberg and CFO David Ebersman will each receive $300,000. All three are eligible for twice-a-year bonuses of up to 45% of their salaries, and those bonuses are tied to their overall performance. Foolish colleague Alyce Lomax has long been a supporter of pay-for-performance packages, and this is a perfect example of this in action.

But let's face the facts: The real bulk of executive compensation is tied to the share ownership when Facebook finally goes public. Zuckerberg will own 534 million shares of the company (28.4%) and retains 56.9% of all voting rights. I can't say I'm a huge fan of the near dictatorship in voting rights, but I definitely like the idea of shareholder interests and Zuckerberg's wallet being inextricably linked at the hip -- I mean, it was Facebook users who generated his wealth for him in the first place.

Similarly, Sandberg, who currently owns 1.9 million shares, has the option to purchase 4.2 million additional shares at low strike prices. She also has 39 million restricted stock units that vest over time, further enforcing the pay-for-performance attitude of Facebook.

Keep in mind that while this seems logical to you and me, some executive compensation packages out there make very little sense.

Cisco Systems (Nasdaq: CSCO  ) CEO John Chambers is a prime offender. Mr. Chambers took home an average of nearly $39 million over the past six years, all while his stock annualized a return of negative 1%. Dean Foods (NYSE: DF  ) CEO Gregg Engles has received an average of $20 million over the past six years despite the stock's annualized return of minus 11% over that period. Even conglomerate General Electric (NYSE: GE  ) CEO Jeff Immelt holds the dubious honor of taking home an average of $12 million a year while his stock fell at an annualized rate of 7% over the past six years.

In short, it's getting increasingly hard to find CEOs who will put shareholder interest first and will tie their compensation to the performance of their business. This is one move that arguably puts Facebook at or near the top of its class in social media.

Disagree with my assessment? Sound off in the comments section below.

For another company that could do right by shareholders, I invite you to get your copy of our latest special report, "The Motley Fool's Top Stock for 2012." The report lists a company dubbed by our chief investment officer as the "Costco of Latin America," and best of all, it's completely free for a limited time only!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Dean Foods and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that believes free is the only true price for transparency.

Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2012, at 3:45 PM, BradReeseCom wrote:

    Hi Sean,

    That's just the "tip-of-the-iceberg" when it comes to Cisco CEO John Chambers:


    Brad Reese

  • Report this Comment On February 10, 2012, at 2:22 PM, ihtfp92 wrote:

    The challenge when designing a compensation scheme for senior management is to take into account *all* the stakeholders: employees, stockholders, society in general and the senior managers themselves. Two points should be clearly addressed - compensation for the nature and difficulty of the work (salary) and compensation for performance (bonus and/or incentives). The latter should be designed to reward only above average results.

    Several changes need to be made to our corporate governance laws to achieve this:

    1) Allow shareholders to approve or veto senior management compensation (abolish all types of golden parachutes).

    2) Remove the limits on salary now imposed by the IRS (excesses here can be checked by point #1 above).

    3) Give stock options with a floating strike price tied to the S&P500 on the date of issue. This will reward only above average performance in both up and down markets.

    4) Forbid any use of derivatives to limit the risk associated with point #3 above.

    5) Require that any options awarded vest between 5-10 years from the date of issue (to ensure a long term outlook). Also require that options be exercised over a 5 year period after vesting (no 'pump and dump').

    If senior management were compensated along these lines it would drastically simplify the evaluation of incentive packages, as well as provide a very powerful alignment of interests between management and shareholders.

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