Reversal of Fortune

When is a $20 million compensation package not really a $20 million compensation package? When 90 percent of it consists of stock awards for a company swan-diving into the abyss on your watch. 

That's the current situation for Sotheby's CEO Tad Smith. Yesterday, Katya Kazakina of Bloomberg detailed Smith's compensation package for his first year on the auction house's throne. The breakdown is as follows: $1.06 million in salary, a $1.1 million signing bonus, and $17.9 million in Sotheby's equity (with $1.4 million of that equity accepted "in place of an annual cash bonus"). 

Smith took the job almost exactly a year ago, on March 31, 2015. This is the the Sotheby's stock chart for the time since:

In the immortal words of Pete Campbell, "Not great, Bob!" Sotheby's share price stood at $42.26 the day of Smith's hiring. As of mid-day EDT today, it was at $25.21. That's almost exactly a 40 percent demon-drop in Smith's hands. And that in turn means that the $17.9 million in equity he accepted has transformed into about $10.7 million in equity today. (Full disclosure: I am a Sotheby's shareholder, and taking a position in $BID late in 2015 is easily the most humbling trade I've made in my short investing life.)

In fact, even my quick calculation may oversell what's actually coming to Smith. Kazakina also reports that, "More than half of Smith’s stock awards are tied to the company’s future share performance. For any payout to occur for that portion, the stock would need to more than double by 2020."

The question is: More than double from what value? Here's the lifetime chart for Sotheby's, from May 13, 1988 to today:

You can see that I highlighted Sotheby's share-price apex in that screen grab. It tells us that $BID has never climbed higher than $57.18, even if we go back to the days when Jordan Belfort was popping Quaaludes and Patrick Bateman was axe-murdering rivals to Huey Lewis [both NSFW, obviously]. If the terms of Smith's deal were that more than half of his stock awards only convey if the share-price doubles from its level when he signed––$42.26––then he has to engineer an ascension more than 50 percent above the company's highest-ever price. Talk about having your work cut out for you...

Or maybe not. The grandest irony of all is that Smith himself probably has very little agency in the company's share price. As financial analyst Josh Brown captured in a tweet last month, Sotheby's performance historically just piggybacks the wealth effect. When the world economy booms and portfolio values rise, elites tend to spend more, especially on luxury goods––and a high-end public auction house like $BID becomes a king-slayer. When the world economy sputters and portfolio values decline, elites tend to spend less––and $BID starts losing limbs like an untreated leper.

Certainly Smith can improve Sotheby's performance somewhat, and I think some of what the company has done under his leadership has been smart. But for Sotheby's stock to more than double in value by 2020, he essentially needs the global economy to go benevolently insane, to a level beyond what we've ever seen, some time in the next 15 quarters. That makes the overwhelming majority of Smith's pay package a colossal gamble––and probably, a losing one. In light of that reality, a $20 million deal ain't what it used to be.