The WSJ reported yesterday that Mark Pincus, CEO of Zynga, has addressed underperformance by some of his executives by cutting their unvested equity grants. There has been lots of discussion in the blogosphere about whether or not this is ethical, or even legal. Dan Primack covered the brouhaha in his lead on PE Week today, and I read through the comments to his post and then joined the fray with the text below:
This is a tricky issue and it's obviously controversial, as evidenced by WSJ's article and the comments below. Fundamentally, though, Pincus has done nothing unethical (based on the facts as presented in the article). Most of the comments (to Primack's PE Week post) confuse the issue by asserting that the option grant given at the time of hiring is earned at that moment - it is not. The purpose of vesting is to ensure that employees perform at or above expectations; they earn the options as they vest over the four-year period. So it is not only not wrong for Pincus to review compensation - including equity vesting - for Zynga employees, it is his responsibility as CEO.
Pincus's primary mistake was trying to nuance the issue by attempting to adjust downward the compensation with the underperformers rather than just terminating them. While in theory it seems logical that these employees may not be worth their current comp but are worth some fraction of it, in practice this is nearly impossible to manage. Making such a major adjustment downward in comp is a declaration that the employee is a "B" player - in the high-performance culture Pincus is working so hard to build, there is no room for "B" player executives. Retaining "MIA" execs (as Pincus apparently called them) is demotivating to employees and erodes the meritocratic culture Pincus is working so hard to build.
There is another and more subtle reason why it is more appropriate to maintain a "black-and-white" line between either keeping executives on or firing them. If you take my argument above to its extreme, it would almost always be in the CEO's interest to terminate early executives later in their tenure, because the amount of equity required to recruit an equally-capable replacement is far less (since the company's equity has increased significantly during that time); therefore, you could get the same performance for dramatically less compensation. This is absolutely unethical, since the early executive took on enormous risk at the time of joining and deserves the outsized equity comp as the reward. So long as she is continuing to perform at a high level.
The simplest way to manage this is ask the following question: "Is the executive performing at an outstanding level, consistent with the level expected at the time of hiring, and comparable to what would be expected from a new executive the firm could recruit to the position?" If the answer is yes, then you have your answer. If the answer is a clear and obvious "no" - and the existence of an "MIA" list suggests there were several of these - then the answer is to let the executive go.
I imagine Pincus was trying to be more compassionate by renegotiating compensation rather than terminating some of these executives, and this is when he stepped in it. show less