Billion-Dollar Award Made a CEO Uneasy. Now He's Fixing It

(Bloomberg) -- The prospect of a billion-dollar windfall left Rick Smith uneasy.

It crept up on the chief executive officer in February, while he was telling employees about an audacious goal to grow Taser-maker Axon Enterprise Inc., the firm he founded in 1993, by more than fivefold over the next decade. If they could pull it off, shareholders would see handsome returns and Smith would pocket about $1.3 billion through a radical compensation plan.

Billion-Dollar Award Made a CEO Uneasy. Now He's Fixing It

There was just one problem: The plan didn’t include his roughly 1,000 workers.

“It was really exciting, but there was this awkward moment when I was standing there talking to everyone about my compensation,” Smith, 48, said in an interview. “The next day, I began working with the board on how to get everyone aligned.”

On Wednesday, Smith revealed a companywide incentive program that’s an extension of his own moonshot plan. If shareholders approve, all Axon employees will receive special equity grants tied to the growth goals. If they’re achieved, the company estimates that payouts will range from about $17,000 for the lowest earners to several million dollars for others.

Smith’s desire to share the fruits of any future success comes as the U.S. grapples with growing income inequality. Executive compensation has soared about 1,000 percent since 1978, while real wages for most Americans rose just 11 percent, according to the Economic Policy Institute.

To hear Smith tell it, CEOs generally are overcompensated, at least in relation to how their companies perform. And while a $1.3 billion payday would put him ahead of almost everyone, nothing is guaranteed -- zero salary or bonuses. If Scottsdale, Arizona-based Axon fails to meet its lofty targets, he’ll have worked for free for a decade.

“I’m one of these optimistic capitalists -- when you do it right, you should divvy up gains between your customers, shareholders and employees,” Smith said. “And CEOs should be more accountable than the average employee.”

Axon is aiming for a more than fivefold increase in market value, revenue and earnings before interest, taxes, depreciation and amortization by February 2028. The compensation plan is modeled on one that Tesla Inc. created for CEO Elon Musk, who could collect an unprecedented payout of more than $50 billion if the automaker achieves similarly bold growth goals. Like Musk, Smith received stock options that will vest in 12 increments if Axon makes progress toward the targets.

Axon’s new incentive program will grant each U.S.-based salaried worker 60 special stocks units with the same vesting requirements as Smith’s options. The awards will come on top of other incentive compensation. Workers earning more than $100,000 per year are eligible to swap between 5 percent and 50 percent of their pay into the plan in exchange for additional units.

Here’s how it works: If an employee elects to defer $10,000 a year of regular pay for each of the nine years remaining of the plan, Axon will triple the number of units, bringing their baseline value to $270,000. If Axon achieves its growth goals and more than quintuples its market value, the employee’s $90,000 investment could yield a payout of almost $1.5 million, the firm estimates.

Nearly half of the firm’s eligible workers, if they elect to defer part of their pay, could make more than $1 million under the plan if all goes well, Smith said. Those who make less than $100,000 per year aren’t offered that option, to ensure no one puts “their livelihood at risk.”

Selling Restrictions

The plan has some caveats. The growth goals may be adjusted to account for acquisitions or shareholder dilution. The special stock units can’t be sold for 2 1/2 years after they vest, and executives are subject to stricter holding requirements than other employees.

Decade-long performance plans are unusual for executives and even more so for rank-and-file workers, because it’s extremely difficult to predict how they may pan out. Goals that are achieved too quickly or not at all can lose their retentive effect and discourage workers.

“This plan does recognize that scale is about the team and not just one person,” said Robin Ferracone, CEO of Farient Advisors, an executive compensation consulting firm. “But I’m skeptical of the complexity and the time horizon that most people, particularly those in high tech, aren’t used to.”

Smith said the program was created to resemble that of an early-stage venture to incentivize people to stay for the long haul and give Axon the “startup superpowers” necessary to lure sought-after tech talent.

“This will open us up to the financial adventurists who want to take risk and be action drivers,” Smith said. “I think we figured out how to scale the Elon Musk magic to the masses.”

©2018 Bloomberg L.P.