Social networking titan Facebook (NASDAQ:FB) has now settled a shareholder lawsuit related to excessive compensation, according to Bloomberg. As part of the settlement, Facebook has agreed to have annual compensation assessments, in addition to hiring a third-party compensation consultant. Facebook may also allow shareholders to vote on whether or not to approve compensation packages.
In 2014, shareholder Ernest Espinoza filed a class action lawsuit against the company, alleging that Facebook was overpaying non-employee directors. The relatively high compensation levels were related to stock awards given to those directors, who earned approximately $461,000 each in 2013. The lawsuit noted that Facebook's directors were effectively able to set their own pay, and Mark Zuckerberg approved the pay packages with his overwhelming majority control.
Does it matter?
Stock-based compensation is always a tricky topic, and Facebook definitely had some weaknesses in its compensation practices that the shareholder was right to bring up. During the year in question, Facebook's compensation to non-employee directors was materially higher than any of its peers, particularly relative to each company's financial performance.
Stock-based compensation is a significant component of Facebook's financial results as well. For example, total share-based compensation expense last quarter was $757 million as the company significantly increased its stock awards within its research and development team. That total was nearly as large as Facebook's total net income of $896 million for the period (after deducting share-based compensation expense). Backing out those costs to arrive at non-GAAP figures translates into $1.6 billion in adjusted net income.
Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. 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.