Annual meeting: April 11, 2019

CEO Shantanu Narayen’s 2018 total disclosed compensation of $28,397,528 represents a 29 percent increase over last year. The major component was a stock award valued at over $25 million dollars. But he took home much more than that. Adobe provides an example of how figures in the summary compensation table often understate the actual compensation value. Narayen realized $64.4 million from 325,815 performance stock awards.

Last year Narayen exercised an additional 363,240 shares, realizing $41.3 million in value.  The year before that, in 2016, he’d acquired 431,242 shares on vesting, realized $38.7 million in value. In 2016 he also exercised 134,530 in option awards, realizing $7.7 million in value.

In each case the grant date value of the awards was significantly below the realized value. The awards were a combination of straight time-based restricted stock units and performance-based stock. Performance shares were based on target, using the stock price on grant date. The performance awards were based relative TSR, and because Adobe out-performed other companies, executives were awarded performance shares equal to 200% of the executive’s target number of shares.

The estimated value of these grants in the summary compensation table the year they were awarded was $15,851 million -- $7.5 million in performance-based-shares, and an additional $8.2 million in time base restricted stock. During that time period the stock price grew from $85.48 to $251.77.  Hence the estimated value was off by over $44 million.

Shareholders, of course, are delighted by the performance.  No one begrudges Narayen excellent compensation. But we believe that even if stock performs well it is possible for a CEO to be overpaid.

The under-estimation of compensation would be less of a concern if Narayen had used at least a portion of the awards to increase his holding in the company, to align his interests more closely with those of shareholders and build a significant ownership stake. However, Narayen’s ownership in early 2019 was 299,654 shares, little changed from the prior two year. In early 2016 he had 366,236 shares. So Narayen’s total beneficial ownership decreased during a time when he was awarded 793,297 shares.

Both performance shares and restricted stock units would vest in various levels in various scenarios regardless of whether performance criteria were met in certain circumstances. In a change of control, even if Narayen remained with the company, his performance shares would accelerate for an estimated value of $61.2 million and his restricted stock units would accelerate for a value of $37.8 million.

One final note: Adobe has Neflix as one of its compensation peers. When one company is overpaid and others add it to their peers it has the potential to hyper-inflate compensation.

Rosanna Weaver