Palo Alto Networks Stockholders Again Oppose Executive Pay Packages

Shareholders push back against a plan that resulted in more than $170 million of total compensation for Palo Alto Networks’ top five executives, including nearly $105 million in option awards.

Shareholders at Palo Alto Networks have once again taken the rare step of fiercely objecting to the pay packages given to the company’s top five executives in the 2019 fiscal year.

During Palo Alto Networks’ annual meeting Monday, only 14.6 percent of shares voted in favor of the platform security vendor’s executive compensation plan, with 67.3 percent of shares opposed to an arrangement that resulted in more than $170 million of compensation for the company’s top leaders. The plan granted nearly $105 million in option awards to four Palo Alto Networks executives last year.

Some 17.3 percent of Palo Alto Networks shares were broker non-votes on the proposal (which typically occurs when investors are going through an intermediary and haven’t provided instructions on how to vote), while 0.8 percent of shares abstained from the vote. The company’s revenue climbed 28 percent to $2.9 billion in fiscal 2019, which ended July 31, while a loss improved 33 percent to $81.9 million.

[Related: Palo Alto Networks Shareholders Oppose Executive Compensation For 2018]

“To the extent there is any significant vote against the compensation of our named executive officers … we will endeavor to … better understand the concerns that influenced the vote and consider our stockholders’ concerns and our compensation committee will evaluate whether any actions are necessary to address those concerns,” Palo Alto Networks said in an Oct. 22 proxy filing with the U.S. Securities and Exchange Commission.

Palo Alto Networks made the exact same statement in October 2018 prior to shareholders heavily opposing a pay plan that resulted in more than $125 million of total compensation for incoming CEO Nikesh Arora despite him spending just 39 business days as CEO during the Santa Clara, Calif.-based company’s 2018 fiscal year.

The company spread the wealth in its 2019 fiscal year, granting eight-figure option awards to four of its top executives: Chief Product Officer Lee Klarich received $40 million in options; founder and CTO Nir Zuk got $30 million in options; President Amit Singh got $24.5 million in options; and CFO Kathleen Bonanno got $10 million in options. This comes a year after Arora received $65 million in option awards.

Palo Alto Networks’ compensation committee significantly changed its executive pay program in fiscal 2017 by adding performance-based equity awards tied to the company’s financial performance, according to the SEC filing. This was intended to enhance the link between executive pay and financial and operational performance, create value for shareholders, increase market alignment and mitigate risk.

When Arora joined the company a year later, Palo Alto Networks said in the SEC filing that it crafted a pay package that tied a significant portion of his compensation to delivering significant value for stockholders. The company continued this practice in 2019 by granting its top executives other than Arora performance-based stock options tied to the achievement of certain stock price targets.

“All our executive officers realize value from their PSOs [performance-based stock options] only when our stockholders realize additional value from their shares of our stock,” Palo Alto Networks wrote in its proxy statement filed with the SEC. The company declined to comment beyond the proxy statement.

The result of the vote was announced after the market closed Tuesday, and Palo Alto Networks stock remained unchanged at $225.29 in after-hours trading. The executive compensation vote is non-binding, meaning that Palo Alto Networks is not forced or compelled to take any specific action.

Still, it is incredibly rare for advisory executive compensation votes to fail, with just 2.7 percent (56 of 2,110) of Russell 3000 companies having their compensation proposals rejected this year, according to an Oct. 3 analysis from executive compensation consulting firm Semler Brossy. The Russell 3000 tracks the performance of the 3,000 largest U.S.-traded stocks.

Stockholders with more than a 5 percent stake in Palo Alto Networks include: Malvern, Pa.-based investment advisory firm The Vanguard Group, which holds an 8.3 percent position in the company, and New York-based investment management firm BlackRock, which holds a 5.4 percent stake. Among current executive officers and directors, only Zuk has more than a 1 percent stake in the firm.

Palo Alto Networks’ compensation committee in fiscal 2019 reviewed pay package data for the company’s self-determined peer group, which includes businesses such as F5 Networks, FireEye, Fortinet, Red Hat, ServiceNow, Splunk, SS&C Technologies, Symantec, Tableau, Twitter and Workday, the filing indicated.

All told, the median annual compensation in fiscal 2019 for Palo Alto Networks' 7,013 employees other than Arora was $219,722. Arora’s total annual compensation for 2019 came in at $23.9 million, or 109 times greater than the median compensation earned by Palo Alto Networks employees other than himself, according to the company's proxy filing with the SEC.