The top five DraftKings executives took home $743 million in compensation in 2020, as the company’s stock soared.
The compensation, largely paid in stock, was well above peers and could hinder DraftKings stock performance going forward, Morgan Stanley warned in a note last week.
The figures on DraftKings execs
Per a company proxy, the 2020 compensation was as follows:
- CEO Jason Robins: $239 million
- President Matt Kalish: $197 million
- CTO Paul Liberman: $197 million
- Chief legal officer R. Stanton Dodge: $56 million
- CFO Jason Park: $56 million
Execs have sold around $176 million of stock on the open market. The company also expects to expense another $1.1 billion in stock-based compensation, over the next 2.1 years, per its filings.
At the same time, DraftKings posted a net loss of $844 million in 2020.
How does DKNG compensation compare to peers?
Among a peer group of companies chosen by DraftKings, the average CEO compensation was $8.9 million, compared to Robins’ $239 million.
The level of compensation looks high, even when considering the performance of $DKNG stock. It was up around 300% last year, around 10x its peers. However, CEO compensation was still 26x that of peers.
When excluding the CEO position, DraftKings paid out $506 million to its next four top execs. That was more than any other SPAC observed by Morgan Stanley.
The next-highest total was $409 million by electric truck Nikola Corporation.
Why was stock-based compensation high?
The compensation was driven by a 2020 long-term incentive plan (LTIP) that ultimately paid out in full. Subsequently, the company started a second 2021 LTIP.
The initial LTIP, set before the company went public, had targets for revenue, stock price and EBITDA. However, the company only had to hit targets in one of those columns to trigger payouts.
The company’s share price run-up last year did just that. DraftKings listed via SPAC at $19 in April 2020 and more than tripled to a peak of $62 that year. The stock reached a high of $74 earlier this year.
When $DKNG stayed above $45 for 30 consecutive days in November, all five possible tranches of the LTIP triggered. That created a $481 million windfall for execs.
A DraftKings spokesperson told LSR the initial 2020 targets may look low in hindsight, but no one realistically expected the stock to triple in 2020.
$DKNG outperformed 497 of the companies in the S&P 500, a spokesperson said.
Indeed, Morgan Stanley’s own initiation note in April 2020 only set a $23 price target, despite a bullish “overweight” rating.
DraftKings also noted its 2021 LTIP did away with stock-based goals.
Not ideal for shareholders?
Morgan Stanley, however, was critical of the initial 2020 LTIP targets.
“While DKNG’s stock outperformed significantly, the structure of the 2020 LTIP was not ideal,” MS said. “As their name suggests, LTIPs should be designed to align the long-term interests of executives and shareholders. A 30-day stock price target does not in our view meet the market best practice of long term value creation.”
The bank also pointed out that DKNG was on track to achieve 10-year revenue targets within two years, suggesting they were not set appropriately.
The targets were not made public until they were hit.
What about profit?
Morgan Stanley also criticized ongoing LTIP targets for being based solely on revenue.
“We believe DKNG should also be focused on achieving EBITDA or cash flow goals long term,” the bank noted. “While DKNG’s execs should get credit for execution, it is almost exclusively exposed to what is a rapidly growing industry.”
What this means for DraftKings stock going forward?
For one, Morgan Stanley lowered its price target for DKNG from $63 to $58. That was in part thanks to the increased number of outstanding shares after the stock compensation.
DraftKings shareholders have relatively little say in things like executive compensation. Jason Robins has 91% of the total voting power for the company through his Class B shares that give him 10 votes per share.
Regardless, Morgan Stanely said the stock “could risk underperformance” if investors are dissatisfied with executive pay.
Is DraftKings addressing concerns?
DraftKings took five steps to align the long-term interests of executives with shareholders in its 2021 LTIP:
- Removed stock price targets from LTIP, with a focus on revenues.
- Company cannot use M&A to hit topline growth targets.
- Execs cannot sell more than 50% of stock received via the LTIP, without losing further eligibility for the program.
- Future stock-based compensation will be spread more widely across management rather than top 5 execs.
- In March, the three co-founders, Robins, Kalish and Lieberman, dropped their base salaries to $1 for the year. That aligned their compensation entirely with company performance.