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Exploding pay

2 June 2014 By Christopher Swann

Cheniere Energy’s employee equity plan is Coca-Cola’s with added sugar. The board wants up to 16 percent of the $16 billion company’s shares handed to the company’s staff over five years. Chief Executive Charif Souki was also last year’s best paid U.S. corporate boss, taking home $142 million. Shareholders can justifiably worry that they’re losing out.

Coca-Cola in April ran into resistance over a similar broad-based long-term equity plan that could have brought an overhang of shares destined for staff equal to 14 percent of the total outstanding. Wintergreen Advisers led a campaign against the proposal. Although it passed at the beverage giant’s annual meeting with Warren Buffett’s Berkshire Hathaway abstaining, the company’s largest shareholder subsequently voiced disapproval. Coke may now make changes.

At Cheniere, there are 8 million shares still to be allocated from a previous plan and the company wants to add another 30 million for the 2014 to 2018 period. That could mean substantial dilution for owners of the 238 million shares outstanding on April 14. A legal challenge to Cheniere’s previous plan, which on Monday forced the company to delay its annual meeting by three months, suggests the new plan may not face an easy ride.

The scale of the plan is only part of the problem. It will pay out if shareholders collect an annual return of 9 percent. But it’s based on a starting stock price of $35, barely half the current level. Even if the stock stays where it now is, employee stock grants in the first year alone could be worth almost $800 million, 5 percent of Cheniere’s current market capitalization.

Using total return to investors as the only metric is also flawed. Performance relative to peers may better indicate the value added by executives. And net income or free cash flow, which depend less on market sentiment, are more reliable long-term yardsticks. Cheniere has yet to report a full-year profit in its 18-year history, and analysts don’t expect it to do so until 2016.

Some investors may give Cheniere and Souki the benefit of the doubt. After all, over the past five years the stock has soared 15-fold as the company capitalized on America’s shale gas boom. The share price has doubled in the past year alone. But the CEO and employees are already paid to do their jobs. They don’t need a big slice of other investors’ gains on top.


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