GameStop (GME 0.12%) has gained attention for its meme stock status and its continued efforts to redefine itself. This has happened under the leadership of Ryan Cohen, a CEO who does not receive a salary, cash bonuses, or stock.
GameStop's board has offered Cohen a compensation package contingent on achieving substantial growth in the stock price and the company itself. This is reminiscent of Elon Musk's compensation at Tesla, which likely played a role in the huge increase in the automaker's stock over the last few years.
Knowing that, does the potential of this package mean investors should buy GameStop stock, or should they stay on the sidelines?
Image source: Getty Images.
Ryan Cohen's compensation package
Under the newly announced compensation package, Cohen would receive stock options to purchase a maximum of 171,537,237 shares of the company.
The awards start if Cohen can raise the market cap to $20 billion and achieve $2 billion in cumulative earnings before interest, taxes, depreciation, and amortization (EBITDA). That would require the market cap (and by extension, the stock price) to slightly more than double in value.
GameStop generated $222 million in EBITDA over the trailing 12 months, indicating it will have to achieve huge EBITDA growth for Cohen to earn even a part of the bonus. If he meets that first goal, he receives 10% of the award.
Subsequent milestones will earn Cohen more rewards, as outlined in the chart below. But to get 100% of the award, GameStop must increase its market cap to $100 billion and cumulative EBITDA to $10 billion. The market cap goal alone would mean he has to achieve an almost 11-fold gain in the stock price.
| Tranche | % of Award | Market Cap Hurdle | Cumulative EBITDA Hurdle |
|---|---|---|---|
| 1 | 10% | $20 billion | $2 billion |
| 2 | 10% | $30 billion | $3 billion |
| 3 | 10% | $40 billion | $4 billion |
| 4 | 10% | $50 billion | $5 billion |
| 5 | 10% | $60 billion | $6 billion |
| 6 | 10% | $70 billion | $7 billion |
| 7 | 10% | $80 billion | $8 billion |
| 8 | 15% | $90 billion | $90 billion |
| 9 | 15% | $100 billion | $10 billion |
Source: GameStop.
At first glance, compensating Cohen in this way may make sense. When he became CEO in January 2021, the company's market cap was $1.3 billion. Today, it has risen to $9.5 billion, a more than sevenfold increase.
Moreover, GameStop has reduced selling, general, and administrative expenses during Cohen's tenure, and he has turned a money-losing company into one that earned $422 million in the trailing 12 months. Investors should also know that he will receive no compensation if he does not meet any of the benchmarks.
Can Cohen achieve that goal?
Giving Cohen a compensation package resembling Elon Musk's will likely draw investor interest. Still, Cohen must revive a company that was being made obsolete.
Initially, he responded to this challenge by expanding its e-commerce and omnichannel capabilities. He also took GameStop into the collectibles business and into Bitcoin investing.
NYSE: GME
Key Data Points
GameStop originally earned most of its revenue through in-store video game sales. But with video game sales having moved online, the company had no reason to continue existing. Knowing that, its turnaround and return to profitability are impressive feats.
Unfortunately, GameStop has to compete with other companies in each of these businesses. This leaves it with little competitive advantage outside of its widely recognized brand. Considering that its trailing-12-month revenue fell 12% yearly to $3.8 billion, that leaves the path to success even less clear.
Is Cohen's incentive package a good reason to buy GameStop stock?
Given the state of the company, investors probably should not buy GameStop stock because of Cohen's incentive package.
With no other source of pay, Cohen has a tremendous incentive to foster growth in the company's financials and stock price. His past successes in his five years at GameStop also indicate he has a chance of achieving at least a partial success.
However, the incentive package also makes buying the stock a bet on Ryan Cohen, putting shareholders in a difficult position. Investors tend to like certainty, and without an obvious path to growth, shareholders are left having to place their full faith in the CEO's leadership.
Such conditions make GameStop a speculative stock, and investors should treat it as such. With its path forward unknown, long-term investors should consider avoiding the shares.
