Meeting May 15, 2019
Joe Hogan, who has been CEO of Align Technology since 2015, had total disclosed compensation for 2018 of $41.8 million. The vast majority of that total comes in Market Stock Units (MSUs) with a grant of 19,200 shares awarded in a February 2018 focal grant and a 43,100 special one-time award from June 2018. MSUs are a form of compensation that is designed to measure relative stockholder return over a three-year performance cycle.
This sounds great in theory, and in more reasonable amounts and with better provisions it could be great in practice. That is not the case here. A few things to consider when evaluating in this case:
1) Hogan already has a significant stake in the company. A table in the current proxy shows that the grant that Hogan received when he was hired in February 2015 MSUs “earned a maximum payout of 150% of their February 2015 target awards.” A table in the proxy statement shows that in 2018, over 200,000 MSU shares vested, with a value of $64.78 million. I believe this undermines the argument the company makes that an additional grant was needed this year to retain and incentivize Hogan. If Hogan holds onto these vested shares it seems like that level of ownership already aligns his interests with shareholders.
2) The company says that the target value for the one time award – the larger part of the grant – was $12 million. Yet the company notes that the sum in the compensation table “reflects the grant date fair value computed in accordance with FASB ASC Topic 2018, for a total grant date fair value of $27,572,363.” This is just for a portion of the grant.
3) While the company repeatedly tries to put the grant in the best possible light by describing what would be needed to achieve maximum payout. Less clearly disclosed is the fact that if the company’s stock price is negative the MSUs can still vest in full. This would only happen if the stock price went down somewhat less than peers, presumably in a bear market.
4) The company has increased the maximum payout over the years. As noted above, the 2015 grant had a maximum of 150% of target. Later grants were at 200% of target and current grants have now increased to 250% of targets.
5) The treatment of MSUs in a change in control situation is problematic. Here’s the formula: “On the date of the change of control, Mr. Hogan will vest in that number of MSUs equal to (A)/36*(X)*(Y) with (A) representing the number of months (including partial months) that have elapsed from the commencement of the performance period through the date of the change of control and (X) representing the total number of MSUs subject to the award and (Y) representing the Performance Multiplier.” Fortunately the SEC requires companies to make an estimate of the value of such calculations, and it is another eye-popping number $67.5 million.
There are other concerns as well. For example, the annual incentive award was achieved at maximum for the second consecutive year, but the specific target goal had been set below the prior year's performance.