The lawsuit, filed by the City of Birmingham Relief and Retirement System, claimed that Netflix’s board “rigged the compensation process, guaranteeing Netflix officers huge cash payments while misleading investors into believing that these payments were justified by attainment of real performance goals.”
The suit alleged that Netflix rigged the system in order to avoid tax penalties and dish out huge cash bonuses to its top employees, irrespective “of achieving real accomplishments that serve the company and its shareholders.” The company, together with CEO Reed Hastings and 13 other executives, were named as defendants. (See also: Netflix "Single Most Frustrating Stock to Cover," Say Analysts.)
The complainant explained in the suit that performance-based compensation payments are “contingent on the attainment of one or more pre-established, objective performance goals.” However, despite having to overcome several barriers to qualify, the shareholder noted that Netflix’s global subscriber-based performance goals were somehow nearly always met.
“By July 2017, Netflix’s top officers had hit their target squarely in seven out of eight quarters, missing by just one percentage point in the other quarter,” the complainant said. “This artificial precision resulted in the company paying these officers approximately $18.73m out of a target pool of $18.75m.”
In December, Netflix converted its executives’ cash bonus system into salary after President Donald Trump introduced a new tax law abolishing the deductibility of performance bonuses. The change means that executives are now paid in full, regardless of company performance.
According to the lawsuit, Netflix’s chief content officer, Ted Sarandos, and chief product officer, Greg Peters, will receive salaries of $12 million and $6 million, respectively, for the current year, more than their combined salary and cash bonuses for 2017.
The shareholder that filed the lawsuit has asked the court to find the defendants guilty of breaching their fiduciary duties by violating federal securities and tax laws. The shareholder wants that the defendants return “all compensation and remuneration” paid “during the time that they were in breach of the fiduciary duties”.
In a statement Netflix said: “We intend to respond to these claims at the appropriate time.” (See also: Spotify Stock Offers ‘Netflix-Like Promise’)