Netflix CEO Gets 50 Percent Pay Increase… Is He Worth It?

12/31/13 10:14AM EST

Netflix CEO Gets 50 Percent Pay Increase Is He Worth It Netflix CEO Gets 50 Percent Pay Increase... Is He Worth It?

Image via Flickr/ Dylan Tweney

Netflix Inc (NASDAQ:NFLX) will give its CEO Reed Hastings a 50 percent increase in pay for 2014. The company revealed the compensation increase in a filing with regulators on December 30. In 2013 shares in Netflix have close to quadrupled. Despite the massive return in 2013, it is unclear that the company’s CEO is worth the massive increase in compensation.

According to the regulatory filing Netflix will pay its CEO $3 million in 2014, after a $2 million package headed his way in 2013. He will also take advantage of $3 million in stock options, up from $2 million in 2013. If Hastings exercised his stock options in 2013, his pay will have been significantly higher given the massive increase in the price of the stock through the year.

Netflix CEO pay jumps

The pay increase will not be begrudged by investors in Netflix. The $6 million package is still relatively small compared to the salaries of those at the head of companies with a similar market capitalization. Netflix stock has performed incredibly well in 2013, and the company appears to have worked out the market for streaming. There are reasons to be suspicious of a pay bump at the top, however.

Netflix is a company with a huge amount of potential, but there are large obstacles in the way. At the end of 2013 the company is valued at around $21.75 billion, more than 300 times 2012 earnings. That means the market is expecting a huge amount of growth from the video streaming company in the next year. If it can’t live up to that expectation the firm’s stock price will inevitably fall.

The growth in stock price at Netflix does not justify the increase in the salary of Reed Hastings. His salary didn’t quadruple, however, so the company is clearly not going on stock price as a guide for executive pay. There are many other factors that the company has taken into account. Earnings at Netflix are expected to more than double in the year ahead, a 50% pay hike at the top is a small price to pay to avoid disruption.

Is Reed Hastings worth it?

Reed Hastings helped to co-found Netflix in 1998, and he has been leading the company since then. He is known for some innovative management techniques, though there have been many missteps along the way for the company. $6 million is just half of 1 percent of the revenue Netflix brought in in the fourth quarter of 2013.

If Netflix grows through 2014, there will be no argument about whether the CEO deserved his raise for the year. If growth stalls, and there are many reasons to think it’s possible, little scrutiny will be put on the compensation package offered to Hastings.

Reed Hastings will earn $6 million or thereabouts in 2014. His leadership has brought the company to where it is today, and he’s probably worth the extras $2 million. Disruption at the top could destroy Netflix Inc (NASDAQ:NFLX) in 2014. $2 million is fairly little to avoid that eventuality.

Disclosure: The author has no position in the stocks mentioned in this article, and does not intend to initiate any position in the next 48 hours.