Over the past week, newsworthy developments on executive pay litigation emerged with suits against Facebook and Netflix on executive pay issues receiving press coverage.
Facebook Under Microscope for Pay Levels and Metrics: This week, two pension funds filed a complaint against Facebook demanding records of advertising revenues, sales incentives, and compensation for executives and directors for the past five years. Facebook has admitted to overestimating its calculation of advertising views (essentially advertising revenue), but has continued to increase executive pay every year from 2014 to 2017 thus prompting the inquiry and the complaint. The plaintiffs previously submitted a request for Facebook to voluntarily turn over the records requested for evaluation, but the company has failed to do so in a manner which satisfied the plaintiffs. The lawsuit alleges that the company’s proxy statement provides insufficient information of how over-estimations, data errors, and calculations are considered by the compensation and governance committee in determining senior executive compensation. The suit cites Facebook’s own statements that it overestimated the average time watching videos by 60 to 80 percent. The suit’s likelihood for success on the merits is small. However, Facebook has recently settled a case targeting the company’s director pay practices, which included enhanced disclosures and governance changes. It is an open question whether this case could result in another such settlement.
Netflix Suit Dismissed, But May Return: A court this week dismissed a suit against Netflix claiming the company violated Section 162(m) of the IRS code by having artificially low annual incentive plan targets from 2015-2017, which violated the 162(m) provision that targets must be “substantially uncertain”. In the complaint, the plaintiffs claimed that the Netflix compensation committee would set quarterly performance goals "lower than or substantially similar to" quarterly streaming revenue projections that were hit almost precisely. The complaint further stated this indicates “the defendants rigged the compensation process, guaranteeing Netflix officers huge cash payments while misleading investors into believing that these payments were justified by attainment of real performance goals.” However, although the Court agreed that the performance goals did not meet the substantial uncertain standard under 162(m), the complaint failed to show that the Compensation Committee knew the plan did not comply with 162(m). Thus, the Court dismissed the case, but will allow the plaintiff to amend the case if specific facts can be shown that the board knew of the 162(m) non-compliance.