Commentary on the construction and disclosure of the pay package for the new CEO of Yahoo

1. CEO Pay Package for Marissa Mayer, new President and CEO of Yahoo
The pay package for Marissa Mayer, the new President and CEO of Yahoo, was announced in an 8-K filed
by the Company on July 19, 2012. The magnitude of the pay package has already garnered significant
attention, and will likely continue to do so in the future as Ms. Mayer’s performance is evaluated. The
focus of this post is to highlight the opportunity for a Board to disclose to the market and shareholders
the rationale behind some of its decision making when it hires highly visible critical talent. It not only
provides insights into the Board’s philosophy on pay, but also demonstrates how it uses pay to help
drive the business.
The Offer
Mayer joins Yahoo from a senior role at Google, where she has worked since 1999 and was the 20th
employee hired by the Company; almost certainly, she has significant relationships and ties to the
Company. While it is highly unlikely that she has any unvested shares or options from her early days at
the Company, any unvested shares or in-the-money options accrued over the past few years would have
been money left “on the table” by leaving and joining Yahoo. Google’s share price has doubled since its
post-crash low in November 2008, and options granted over that time could still be unvested,
depending on the vesting schedule, while having considerable value. Unvested shares, independent of
when or at what price they were granted, are money that Mayer is walking away from. These factors,
among many others, were likely considered in formulating the size and structure of the offer. The terms
of her offer were as follows:
 $1M base salary
o Commentary – very appropriate for a company with $5B in revenues
 $2M target bonus (200% of base salary)
o Commentary – A target bonus of 100-200% is very appropriate for a company of Yahoo’s
size. While 200% is a little on the high side, it provides for a very strong incentive to Ms.
Mayer to achieve annual financial results, especially considering an additional 2X upside to
the extent she exceeds performance goals.
 $3M target cash compensation
o Commentary – very appropriate for a company with $5B in revenues
 $12M annual LTI award, 50% of which are time vested restricted stock units (RSUs) and 50% of
which are performance-vested stock options (performance criteria TBD after a discussion between
the Board and Ms. Mayer)
o Commentary – the “performance vested” nature of the awards were somewhat unique
from two perspectives:

2. A. They are “performance-vested” versus the more traditional “performance-based.”
Performance vested equity awards usually mean that they will ultimately vest based on
service at some point in the future, but vesting can accelerate or move up sooner if
certain performance goals are achieved. Performance-based awards usually mean that
you can either earn more, less, or the target amount of the award based on
performance. In Ms. Mayer’s case, the disclosure is a little unclear but appears that Ms.
Mayer will still ultimately receive the options even if the performance criteria are not
satisfied. If this is the case, what message is the Board sending here? Is the Board trying
to incent a speedy turnaround?
B. The performance criteria are tied to the options instead of the RSUs. Options, by
themselves, are already inherently performance-based since no value is delivered until
the stock price appreciates above the base grant price. Performance criteria are more
often attached to RSUs, making them performance-based RSUs or PSUs.
 $14M “make whole” LTI award – time-based RSU’s that vest over 29 months
o Commentary – While Ms. Mayer’s package at Google was not publicly disclosed, as she was
not one of the Top 5 executive officers, it would have been easy for the Board or its
executive compensation consultant to value the stock, options, or other compensation that
she was leaving on the table at Google by simply obtaining a schedule of her prior
compensation and equity grants. The Board could then assess the “in the money” value
(current price – exercise price for options and current price for unvested restricted shares)
and potential future gains for “out of the money” value (those unvested options that still
had time left before expiration) she left behind by resigning to come to Yahoo. The amount
certainly does not seem unreasonable for the #20 employee at Google and who was in a
very senior role, especially given that the non-founding members of Google’s Top 5,
according to their most recent proxy, had outstanding, unvested equity awards ranging from
$22M to $44M. The only missing aspect of the award is why the vesting varies ($4M, $7M,
$3M) over the next three years instead of having them vest in equal installments. Was this
aligned with the timeframe that the forfeited Google equity / other compensation was going
to vest or is there some other reason the vesting was structured the way it was?
 $30M retention LTI award -- time-based RSU’s that vest over 5 years and performance-based stock
options that vest over 4.5 years.
o Commentary – Given the CEO turnover at Yahoo (Ms. Mayer is the 7th CEO for the Company
in 5 years), it is clear that the Board wanted a very significant incentive for her to remain
with the company and ensure some continuity at the top. This award would certainly go a
long way to accomplish this. The only concern might be what type of performance criteria
are attached to the options. Usually, retention-based awards are devoid of performance
criteria to make them more retentive, such that you need only remain employed in order to
receive them. If the performance objectives are perceived as not-attainable, or, down the

3. road, if it becomes clear that they will not be attained, the retentive aspect of the awards is
diminished.
 Pay Mix of 60% “fixed” and 40% “variable” pay
o Commentary – The overall pay mix (mix of fixed pay vs. variable or performance-based pay)
is over-weighted towards the fixed. Tallying all pay elements, Ms. Mayer’s pay is roughly
60% fixed and 40% variable. For a CEO, we would typically see those ratios flipped and a
breakdown of 70% variable and 30% fixed, ensuring that a significant portion of total
remuneration is subject to performance criteria. Why the Board chose a reduced
performance orientation would be good for shareholders to know.
 “Fixed” pay includes base salary and time vested RSUs (while the ultimate value of RSUs
may “vary” based on stock price, they are still regarded as “fixed” pay since value will be
delivered regardless of stock price performance)
 “Variable” performance-based pay includes annual bonus and stock options
Commentary on Disclosure of Package
The pay package looks to be reasonable based on all the factors disclosed from a “how much” point of
view. However, from our perspective, having done a tremendous amount of work in the high-technology
executive compensation arena, the justification for and analysis of the package construction are not well
described in the 8-K filing. It could have been much more effectively presented in perhaps a “mini
CD&A.”
For example:
 Media estimates of the value of the package range from $70M to $120M depending upon
publication/news venue, how they valued the package and over what time frame. The value as
defined in a summary compensation table would have been $59M in total (valuing all stock awards
and options at the time of grant using either face-value for restricted shares of the Black-Scholes
value for stock options). Yahoo could have managed the reporting accuracy of this number by
disclosing the value of the package in total.
 The filing is silent with respect to the process the Board used to arrive at the numbers – e.g., using
Yahoo’s existing Peer Group and how this package compared to that Peer Group, the breakdown of
RSUs and options, why performance accelerated options (vs. plain vanilla) instead of performance-
based RSUs, why the amounts of the make-whole award vesting varied, etc. Obviously, this is a role
with high risk and visibility. Given Yahoo’s position in the market and Ms. Mayer could easily have
remained at Google, a lucrative package was necessary to attract her. Explaining how the structure
of the package was determined would have been helpful to shareholders and investors. The

4. performance criteria for the annual LTI award is not specified, and it appears to be an acceleration
of vesting vs. performance-based vesting.
Thus, it is unclear whether Ms. Mayer will receive the options at all or whether the timing of when
she will receive them will simply accelerate based on performance. If the performance criteria are
not satisfied, will she still ultimately receive them based on the service requirement? Moreover,
whileit is understandable that the Board wants to consult with the new CEO before imposing these
performance criteria, hopefully, it has a strong idea of what they would like her to accomplish in her
first year (achieve budgeted financials, make a strategic acquisition or two, improve the share price,
etc.) Again, this is understandable but likely disconcerting to investors who want the Board to have
some plan of action with the hire of a new CEO.
Conclusion
So, while all the factors above (e.g., attracting an executive from a top competitor like Google, the value
of her outstanding equity, etc.) likely influenced the Board’s decision, not describing some of the
rationale about pay mix, equity vehicle choices, and lack of performance criteria disclosure will keep
shareholders guessing or reaching their own conclusions. The Board obviously made a compelling offer
to Ms. Mayer or she would declined it, so the main goal of securing a new CEO has been accomplished.
Hiring such a visible executive also presented a good opportunity for the Board to communicate to the
market and to shareholders why it did what it did.
At Connell & Partners, we help clients develop strategic compensation plans that are aligned with
shareholder interests and are designed to attract, motivate and retain a high caliber workforce. We
also consult on the disclosure of the executive compensation packages in financial filings.