Netflix Raised Executive Salaries – Performance-pay a Hoax

Some of Netflix's top executives have a good reason to celebrate starting this Thursday. A recent statement announces that Netflix raised executive salaries, going from performance-based paying to basic salaries. It was something that the Netflix big fish should thank the recently-passed tax bill.

However, everything might not be so black and white. The paycheck for top men at Netflix will most probably not change at all. Superficially, it looks like they are in for an enormous raise. In fact, their annual balance will pretty much stay the same. The thing that we can learn after this new policy became effective is that the whole performance-based salary system was nothing more than a clever scheme.

Has Netflix Raised Executive Salaries or Not?

We should introduce a backstory before the answer to the question becomes self-evident. For almost 25 years, ever since the Clinton presidency, tax deductions for top executives have had a limit of $1M per one executive. However, as is the case with many tax laws, there was a loophole. The surplus is deductible by a company if it declares it as performance-based. This way, the board could set financial targets, and if they hit these targets, executives would get a fat bonus.

In comes President Donald Trump, who on December 22 finally killed the loophole through the signing of the Republican tax bill. Since then, none of the salaries will be deductible, no matter if they declare them as performance-based or not. That prompted Netflix to issue a filing in which it declared that all cash compensations for the following year will be paid as a regular salary.

The Executive-Worker Gap is Growing

The idea behind the limit imposed on tax deductions was created in 1993. Its goal was to put under control executive compensations which were rising and getting out of hand. The jewel of Bill Clinton's 1992 presidential campaign was to tackle corporate tax deductions. However, in real life, the scheme never really took off.

One epilogue of it was that the corporations resorted to linking executive salaries to the stock market. In turn, this only further boosted compensation. In 1965, average CEO salary at 350 most successful US companies was $843 thousand, while in 2015 that number was a staggering $15.7M, according to the Economic Policy Institute.

Moreover, if we compare CEO salaries to those of an average worker, we get even bigger discrepancies. Back in 1965, CEOs made around 20 times more than an ordinary worker. In 2016, that number goes up to 270.5 times. Because of the CEO salary-Stock Market relation, average executive salaries reached highs in 2000 (441.3 times worker salary) and 2007 ( 347.5). During all that time, the salary of workers remained at a stall.

Executives That Profit the Most at Netflix

After getting a glimpse of the background and some aspects of the scheme, it's time to go back to Netflix. The new compensation plot that the company created will affect Chairman Reed Hastings, Concent Officer Ted Sarandos, Financial Officer David Wells, Product Officer Greg Peters and General Counsel David Hyman. Before this Thursday, their payment was a combination of the main salary and a bonus that was performance-based. From now on, however, Netflix will integrate the bonus into the main salary and their compensation will no longer depend on performance goals.

So, for them, it probably doesn't really matter a lot that Netflix raised executive salaries. However, that's not the whole story. Netflix seems to be doing pretty well, so all of the chief executives are in for an average 20% raise. On top of that, Netflix's original content budget is growing and they are thinking of splurging 7 figures on a new producer in the following year.

Final Thoughts

Do you think Netflix's boat will be rocked by the new Tax bill in power? Do you think the fact that Netflix raised executive salaries was well-earned by the men in power? Are you satisfied with the content they are creating and the direction in which the company is heading? Let's talk about it.