Pandora Cries Poor as Executives Get Filthy Rich

NEW YORK (TheStreet) -- The other day Pandora (P) announced that its longtime CTO Tom Conrad would leave the company in three months.

That prompted me to run the numbers on Conrad's options-related riches.

Since April 2012, Conrad has generated proceeds of $43,332,556 mainly by exercising his Pandora employee stock options (I calculated the total proceeds from 50 automatic sales between April 2012 and mid-March 2014).

Please forgive me if that number's off by a couple million or so. It's difficult to keep all the transactions in order as I scan them and do the math on Conrad's insider roster at Yahoo! Finance.

The data reveals something of a startling double standard at Pandora. It's so mind-boggling that I moved through the calculations multiple times just to ensure they were in the ballpark.

How could a company have the audacity to lavish stock options on its executives as it's embroiled in a fight where its main argument is We can't afford to pay you this much? That's the height of arrogance, God awful PR or a mix of both.

For the record, I spot-checked my figures at the SEC Website, where you too can view Pandora's party like it's 1999 insider transaction data.

I should also note -- $43,332,556 represents Conrad's gross proceeds from his many sales of Pandora stock. But when you consider his typical cost bases (16 cents per share, 34 cents per share and, for a relatively small number of options, up to $13.26 per share), the gross isn't far from the net. And, of course, Conrad pays taxes -- as far I know -- on those proceeds so he doesn't receive the entire windfall noted above.

Using the same timeframe, methods and similar disclaimers for Pandora co-founder and former Chief Strategy Officer Tim Westergren, I came up with proceeds of $22,544,500. While he showed more restraint -- or just didn't receive as sweet a deal as Conrad -- $22 million and change in gross proceeds isn't anything to spew at.

We could conduct the same calculations for other Pandora executives and directors and come up with equally-as-mind-blowing numbers.

I've never been opposed to executives getting rich on stock options. It's pointless to cry about the practice. The SEC doesn't seem to care so why should I. That's the height of apathy, I know, but you've got to pick your battles in this life or you risk ending up like Billy Joel's Angry Young Man.

And I've never been one to cry a river for musicians and a record industry that claims Pandora's ripping them off. I tend to agree with Pandora -- the music industrial complex focuses too squarely on royalties, ignoring how the exposure Pandora provides and the data it collects can help market and monetize music in unprecedented and prolific ways.

But what rubs me the wrong away is that, as Conrad, Westergren and others enrich themselves as individuals, they cry poor speaking on behalf of Pandora the company. For years now, Pandora has held exposure and data out as carrots while stopping way short of using these things to diversify its business and benefit the music industry.

Here's Westergren doing just that, via a shill piece Fast Company wrote a few weeks back:

Ironically enough, Pandora's been planning on building these audience-engagement capabilities for a while now, but they haven't had the resources due to royalty fees, which eat into half of Pandora's revenues.

For the record, Westergren has said the same to me in the past. He's been singing the same tune of how royalties curtail Pandora's ability to craft data products and be a better partner to the industry -- particularly labels and musicians -- for quite some time now.

And here's Conrad expressing the same sentiment, albeit indirectly, in an article that illustrates his widely-accepted genius as a CTO:

As Pandoras early success grew, the money was the sticking point: With all the revenue going out to rights-holders, there was less to invest in the technology and product than anyone at the company would have liked.

Granted, I'm making a symbolic argument here. But it's an important one. It's about the signals corporate executives send and the fact that they're allowed to get away -- unchallenged  -- with sending them. It's about the idea that companies, especially in tech, almost appear to be set up to make employees (high-level and otherwise) wealthy irrespective of how the company performs for its stakeholders.

Pandora could end up a failure, thanks in large part to the groundwork the likes of Conrad and Westergren laid and, other than dings to pride and ego, they'll pay no price.

Pandora executives have no problem plucking easy money off of the employee stock options tree -- and becoming filthy rich in the process -- at the same time as they cry poor as a company.

Now, again, I fully understand that the money Conrad, Westergren and others collect from their options might as well not even be real. It's as close as you can come to collecting money that grows on trees. There's really no practical association between the cash they collect as benefactors of stock options and the money Pandora spends to run its business. (Relatedly, I should point out that Pandora did announce a secondary stock offering late in 2013).

But how can Pandora look musicians, record labels, rights holders and investors in the face and say we can't afford to a.) grow our business by building data products and b.) help the artists we purport to care about as we enrich ourselves to otherworldly heights?

You have to question the integrity of people who have nothing on the line. They're set for life from financial standpoints. And as they situate themselves to retire in style -- the way Conrad can and probably will -- they tell the music industry and musicians that we simply can't afford to be the best partner we can be because you're taking too much money from us.

Do these people have no shame? Because they certainly have quite a bit of nerve.

That might seem harsh, but what we have received from Pandora is much worse than bad PR. Just because getting rich on the back of stock-based compensation is a way of life in tech, particularly in Silicon Valley, doesn't mean guys like Conrad and Westergren should be able to get away with it -- no questions asked -- in what is a very specific situation. Few other companies vigorously fight the entities that provide/license them content in court and Congress in one picture and make employees multi-millionaires in another.

Put another way -- Conrad and Westergren effectively argue that, within the constraints of our operation, we can afford to become millionaires, however, within the constraints of our organization, we cannot prioritize and, in turn, unleash the power of the data we collect to generate new lines of revenue for our business and positively impact the tenuous Pandora-music industry relationship.

--Written by Rocco Pendola in Santa Monica, Calif.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks. Rocco Pendola is a columnist for TheStreet. Whenever possible, Pendola uses hockey, Springsteen or Southern California references in his work. He lives in Santa Monica.

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