Newly installed Alphabet (GOOGL) - Get Alphabet Inc. Class A Report CEO Sundar Pichai has a new compensation package, and it sounds like a better deal for investors than has ever been the case at the search giant.
For the first time for a Google executive, stock grants are tied to performance of the shares against the S&P 500 Index over multiple years. That’s intriguing given that Alphabet this year has just barely edged out the S&P, rising 29% vs. 28.6% for the Index.
As disclosed in an 8-K filing, Pichai’s new plan includes two tranches of what are called “performance stock units,” awards of shares whose value is tied to how Alphabet stock does over a three-year period from 2020 through 2022. Each tranche is worth $45 million.
The fine print of the 8-K says Pichai can obtain from 0% on up to 200% of the tranches’ value, so $180 million in total, depending on the performance of Alphabet relative to the S&P in the three-year period. The exact delta required to release that full value isn't specified in the document, but the document promises more details in the 2019 10-K filing once it is filed.
The performance requirement is a change from traditional “GSU,” or restricted stock units, which simply vest over time without any performance criterion. Pichai will also receive $120 million in GSUs, vesting quarterly over the course of 12 quarters, beginning with the March quarter of 2020. His last stock compensation package, enacted in 2016, was for just more than $199 million in GSUs, according to InsiderScore.com.
In addition, Pichai’s base salary rises to $2 million annually vs. the $650,000 per year he has been making.
Morgan Stanley analyst Brian Nowak, who follows Alphabet shares and rates them overweight with a $1,450 price target, wrote in a note to clients that, “This, in our view, is a bullish signal about GOOGL management's incentives and potential actions.”
Pichai, who has been with the company since 2004, had been chief executive of the Google Inc. unit of Alphabet since August 2015, when the Alphabet holding company structure was first incorporated. He will now be CEO at both the Google unit and the holding company, Alphabet announced on Dec. 3. Pichai takes over from co-founders Larry Page and Sergey Brin, the latter of whom served as president of Alphabet. The two co-founders will give up their executive roles but will remain on the board of directors.
Since the formation of the Alphabet holding company, Alphabet stock has roughly doubled, much better than the S&P’s 55% return during that four-year period. Morgan Stanley’s Nowak, however, pointed out that Alphabet shares have trailed the gains of large-cap peers over a multi-year period.
“GOOGL’s performance vs the S&P 100 has been mixed beating index 4 of the past 7 years,” he wrote.
“Notably, this lags [Facebook] (FB) - Get Facebook, Inc. Class A Report (which has outperformed in 6 out of 7) and [Amazon] (AMZN) - Get Amazon.com, Inc. Report (5 out of 7) ... largely driven by the timing/impact of investment cycles.”
Nowak observed that “Given GOOGL competes for investor capital with these other large tech names ... this incentive structure could help close this gap.”
Alphabet stock closed down fractionally on Monday at $1,350.63.