Robinhood's Unusual Performance Award Metric for Founder RSUs

In July 2021 stock trading app Robinhood made its public trading debut on NASDAQ. Also in the headlines around that time was news that Robinhood’s two co-founders each received an award of performance based RSUs just prior to the company’s IPO.

No TSR or Earnings Related Metrics: Robinhood Grants Performance-Based Awards Tied to Stock Price Growth

Issuance of stock awards to executives, founders and other employees prior to an IPO is a common practice.

Of note in this situation are the performance related conditions attached to the Robinhood RSUs.

Breaking from the popular approaches of using total-shareholder-return or earnings/profit factors as performance metrics, vesting of the Robinhood co-founders’ RSUs is tied completely to a more unusual, single factor: stock price growth.

Described in the company’s S-1 filing, the RSUs have an 8-year term, with seven different potential vesting tranches tied to stock price goals. The S-1 filing notes “the measurement period was selected to reward the co-founders only if we achieve sustained stock price growth.”

Exploring the Unusual: Why Stock Price Growth is Not Often Used as a Metric for Performance Based Awards

Sustained stock price growth seems a noble goal for any public company. Yet is it wise to have such a one-dimensional measurement of company performance? Why do we not see this used as a routine metric for performance based awards in other public companies?

Along those lines, it seems most investors would agree that a company’s stock price performance, while certainly impacted by the organization’s actions and results, is not linked exclusively to company-specific factors. Things like economic, overall market, and a myriad of other conditions can play a role in stock price growth or decline. So, while stock price may be one of several indicators used to evaluate a company’s performance, it is not often used as the only or top metric.

This understanding of stock price impacts is likely why many companies, when designing performance based awards, opt for value related measurements like total-shareholder return measured against peer performance. Or, revenue or profit metrics (second most popular behind value related metrics, according to recent data from the NASPP/Deloitte Consulting  2021 Equity Incentives Design Survey).

Robinhood’s focus on stock price as the single metric for the founders’ RSUs has been the subject of several articles since the company’s IPO, many of which suggest that stock price often does not reflect accurate executive or company performance.

A Reuters article on the topic (“Robinhood’s Pay Structure is Meme Stock Heaven,” Aug 4, 2021) surmised that:

 “One helpful gesture would have been to make awards contingent on cleaning up some of Robinhood’s many legal and regulatory uncertainties, which include multiple lawsuits from disgruntled customers and a probe by the Securities and Exchange Commission. At Wells Fargo (WFC.N), boss Charlie Scharf’s pay is explicitly linked to mending regulatory fences after years of customer abuses that pre-date his tenure at the bank.”

The Wall Street Journal also covers the awards in the article “Today’s Tech Founders Don’t Just Own the Company. They’re Also Getting Huge Pay Packages,” Oct. 16.”

At the time this blog was written, Robinhood’s stock price was 60% lower than at its IPO debut. It is certainly still early in the 8-year stock price growth trajectory laid out in the terms of the founders’ performance awards.

At this point, only time will tell whether stock price goals will transpire to an effective performance metric for Robinhood.

Current Trends in Performance Award Design, Including Common Metrics

While each company should evaluate its own circumstances and goals in establishing performance award metrics, the following are current trends in the use of performance awards within public companies (source:  NASPP/Deloitte Consulting 2021 Equity Incentives Design Survey):

• Nearly two-thirds (74%) of respondents utilize 2 or more performance metrics for awards.

• Over 70 percent of companies tie vesting in performance-based awards to value metrics.

• By far, the most used value metric is total shareholder return (TSR), at 61 percent of overall respondents.

• Three years is the most common performance period among respondents for all types of performance-based awards: 84 percent of respondents that grant performance shares, 78 percent of respondents that grant performance cash/units, and 54 percent of respondents that grant performance-based options/SARs.

Stay tuned! We’ll be covering more performance award trends in an upcoming episode of our  Equity Expert podcast.