Money Stuff: Moonshot Pay Kind of Works

The point of executive pay is to create incentives. Public companies should structure their chief executive officers’ pay packages to encourage the CEOs to act the way the companies want. What do the companies want? I dunno, it depends. Plausibly, for most companies, the answer is something along the lines of “steadily increasing profits.” Those companies should give their CEOs pay packages that encourage them to steadily increase the profits. What does this look like? Maybe a nice base salary so the CEO doesn’t have to worry about paying rent, a big bonus if profits go up, a chunk of stock options so that the CEO shares in any gains she creates for shareholders. Normal stuff.

One important notion in executive pay theory is that the shareholders of a public company tend to be less risk-averse than the CEO, so they have to structure the CEO’s pay to encourage her to take risks. The idea is that the shareholders can diversify away the idiosyncratic risk of the company (they can own lots of stocks), while the CEO mostly can’t (her paycheck, human capital and reputation are tied to the one company, plus she probably has a lot of stock she can’t sell). If the company goes bankrupt, or the stock falls a lot, that’s okay for the shareholders — they’re diversified — but existentially bad for the CEO. If the company has the opportunity to do a project with an 80% chance of doubling its stock price and a 20% chance of leading to bankruptcy, arguably — arguably — the shareholders will want that and the CEO won’t.

And so the board of directors, in fulfilling its fiduciary duties to the shareholders, should try to structure the CEO’s compensation in a way that encourages her to do that project. Mostly that means stock options. The stock options are worth zero if the stock goes to zero, and zero if the stock stays flat, and a lot of money if the stock goes up. So the CEO has incentives to take risks, incentives that might overcome her natural risk aversion.

You could go further with this idea. You could think: “Look, modern public markets are highly concentrated, and a lot of the returns in any investor’s portfolio will come from a few huge winners. The huge winners are all that matter. For a sensible diversified shareholder, it doesn’t matter that much if any stock in your portfolio goes down 100%, or down 10%, or up 10%, or up 50%. All you should care about is finding the stocks that will go up 1,000%, and buying as many of them as possible. If you put 90% of your money into stocks that go down 50%, and 10% of your money into stocks that go up 1,000%, you’re better off than if all of your stocks went up 20%. Getting big winners is all that matters.” I don’t think that this line of reasoning is exactly right, but it has a certain appeal.

If you think like that, you will want the CEOs of your portfolio companies to think like that. [1] If the company has an opportunity to do a project with a 90% chance of abject failure and a 10% chance of huge success, the CEO should do it. Arguably — arguably — startup founder-CEOs operate like that; arguably they take big risks on world-changing projects with low probabilities of success. But public-company CEOs, with steady jobs and established brands and thousands of people reporting to them, usually don’t. If you came to the CEO of a successful public company and said “this project has a 90% chance of destroying the company, but,” she is going to stop you right there. Absolutely not!

But, you know, incentives. If you give the CEO a pay package that pays her $0 if the stock goes to zero, and $0 if the stock is flat, and $0 if the stock is up 20%, and $0 if the stock is up 100%, [2]  and one bajillion dollars if the stock is up 1,000%, she will get the message. If someone comes to her and says “this project has a 90% chance of destroying the company, but,” she will shrug because she’s indifferent to that, and if you continue “but it has a 10% chance of increasing our value 2,000%” she will say “ah yes that’s just the kind of project I need,” and do it.

And this is what you want! In this hypothetical! You want a CEO who takes huge swings, or rather, you want like 20 CEOs who take huge swings, 18 of which won’t work out and two of which will. That is the theory of portfolio management that we have constructed here, and the theory of executive compensation that follows from it.

This theory of executive compensation leads to what are often called “moonshot” pay packages, and I suppose it was kind of invented by Elon Musk. It has spread beyond him, and there are now several public-company CEOs who get paid like this, with huge options grants contingent on hitting very aggressive growth targets.

And if you get what you want — if you get a bunch of CEOs with huge moonshot pay packages — then you can’t complain when it works out as advertised. In particular, it is a probabilistic theory. You should expect most of the companies not to work out. If every CEO got paid the full amount of her moonshot pay target, then your targets were too easy. What you want is, you know, 70% or 80% failure. If you get 98% failure, the targets were too hard and you did not incentivize the plausible risk-taking you wanted. [3] If you get 8% failure, the targets were too easy and you’re just giving away money.

Anyway here’s a Wall Street Journal article saying that the moonshot pay packages are perfectly calibrated:

Promising CEOs the moon hasn’t been a great way to get out-of-this-world results.

Dozens of companies—including KKR, Rivian Automotive, Roblox and Robinhood Markets—hammered out $100-million-plus “moonshot” pay packages with their chiefs in the years after Tesla awarded billions of dollars in stock options to Elon Musk in 2018. The potential for huge payoffs was meant to spur outsize returns.

So far, few of the CEOs have managed to deliver, a new analysis has found.

Shareholder returns trailed the S&P 500 at three-quarters of the 20 companies crafting such pay packages for their chief executive officers in 2020 and 2021, at the peak of the trend. Half of the CEOs forfeited much or all of their stock awards. Four, including the private-equity firm KKR’s co-CEOs, have met all their targets for awards recently valued at a combined $2.6 billion. Where the meter is still running, CEOs have earned only about a quarter of the total, on average.

Yeah but the first Elon Musk package did work out. The returns are supposed to trail the S&P at most of the companies! Most of the CEOs are supposed to forfeit the awards! Otherwise they wouldn’t be moonshots.

I’m exaggerating a little. In fact what often happens is that the CEO doesn’t hit the super-aggressive targets to get the award, and the board says “meh but she’s doing such a good job anyway,” tears up the compensation package and gives her a big normal bonus anyway:

Roblox canceled a 2021 award for David Baszucki, originally valued at just over $230 million, three years into a seven-year term, before any was earned. Roblox said the arrangement “was no longer satisfying the Company’s compensation objectives” of aligning Baszucki’s long-term interests with shareholders’ while discouraging risk-taking for short-term results. The company switched to making annual equity grants. 

Yeah, the boards don’t really believe in the moonshot stuff either. 

I wrote yesterday about, honestly, some stupid stuff. The gist of the story is that a guy named Steve Yegge did an open-source artificial intelligence thing called Gas Town, and then someone launched a meme token referencing Gas Town on a crypto platform called Bags, and that token ($GAS) traded a lot at valuations as high as $40 million — for nothing! — and generated some royalties (i.e. trading fees) on Bags, which apparently Yegge collected. Memecoin venture capital, I called it: You have Yegge doing a business, and then you have some anonymous financier on Bags providing him financing, and making money, with, uh, whatever this is.

I got some emails! One point I made was that using meme tokens — things with no economic rights — to finance projects is an innovation of crypto. “It is genuinely novel,” I wrote. “People did not raise money like that, before.” That was a little loose, and naturally readers proposed possible antecedents. Is “Green Bay Packers stock” also a form of meme-token financing that long predates crypto? Sure, maybe, sort of. [4] Maybe you can think of other examples.

Another reader pointed out that, on Monday, Pump.fun — another memecoin platform — launched its own actual venture program, called the Pump Fund. Sure!

That reader also argued:

Becoming involved with crypto like this, launching a token associated with your real identity, has to be a top 10 way to ruin one’s life, in a way that starting a normal company is not.

While a coin may not give “rights” to its holders, e.g. dividends, tokens’ creators have more obligations than the founders of a normal company. If you found a company and it doesn’t work out, people are at least polite about it and probably say “Better luck next time.” If you launch a token and walk away from it, crypto people will publicly harass and shame you for years.

On the one hand, I believe this. On the other hand, tell it to Eric Adams. 

Another email I got was from a guy who collects, and launched a platform for trading, Chuck E. Cheese tokens. This has nothing really to do with crypto but is kind of funny. Someone else has a crypto token backed by physical US pennies in “a vault you can visit.”

And then I got like a dozen emails about something else. In describing this mechanism of financing through memecoins, I made a joke about “The Bleebzorx Network,” so of course someone launched that on Bags. The royalties (i.e. trading fees), apparently, are directed to my X account. I don’t know what that means, exactly; I assume that it means that I can collect the royalties and no one else can. [5] I have not collected the royalties, I do not know how to collect the royalties, and I would not collect the royalties even if I could. (As of noon today they were about $9,500.) But for the record I suppose I should say:

1. I have no involvement in this and do not endorse it. I suppose I should have anticipated that something like this would happen, but I honestly didn’t.
2. While I do not give investing advice, this is obviously dumb and I personally would not, and will not, buy any $BLEEBZORX. In fact, I will go so far as to say that, if you do buy it, you will definitely lose 100% of the money that you put into $BLEEBZORX, and also your self-respect and the respect of your loved ones. “Ooh I bought Bleebzorx tokens,” listen to yourself.
3. I am not going to collect the royalties that are supposedly accruing in my name.
4. That said, I do understand that memecoins run on attention and that, by writing about this, I might increase its price and volume and thus the royalties. (“Allow me to get richer just by telling you about it,” Yegge wrote.) I also recognize that many of the people who emailed me to tell me about it probably own $BLEEBZORX coins and were hoping that I would write about it so the price would go up. [6] I am writing about it for journalistic and amusement purposes, not to pump it, but I recognize that in doing so I might be pumping it.
5. I am trying not to! I really truly do not want you to go around trading $BLEEBZORX for speculation or to generate royalties for me, for a variety of reasons, including (1) I will not collect the royalties so you’re not doing me any favors, (2) the thing above about people ruining their lives by being associated with memecoins and (3) I like to think that this column is a classy establishment and I would be very embarrassed if my readers were going around falling for dumb memecoin pumps.
6. Because memecoins thrive on attention, I am not going to write about this again. I will pay no more attention to $BLEEBZORX, so you should not buy it to bet on my continued attention.

Most of the time, when a company signs an agreement to acquire another company, it’s because it wants to acquire the other company. The agreement means what it says: Company A signs a merger agreement to buy Company B because Company A wants to own Company B. Company B has something — employees, customers, products, etc. — that Company A wants, so Company A agrees to buy it.

It is possible to imagine degenerate cases, mergers-and-acquisitions cases where Company A signs an agreement to buy Company B without actually wanting to do it. For instance: Company A might fear Company B as a competitor. It might not care very much about acquiring Company B’s employees or products or know-how, but it might want to stop Company B from using them. Traditionally one way to do that is by buying Company B — it is not unheard-of for a company to buy a competitor to shut it down — but you could get creative. For instance:

1. You might go to a smaller competitor and say “hey, we love what you’re doing, we’d like to buy you at a big premium.” They are like “cool great we’d love that.” You sign a confidentiality agreement and maybe a letter of intent and you start on due diligence. You get copies of all their customer contracts, you interview their employees and customers, you tour their factories, you look at their financial accounts, and you generally get a sense of how their business ticks. Your due diligence is lengthy and onerous, distracting them from doing their jobs. Then you steal all the good ideas for yourself, call all their customers and offer better deals, and never actually sign a merger agreement. You use the pretense of a merger to get inside their business, so you can compete better yourself.
2. You might see a promising smaller competitor with a great product and team, but not enough money to compete with you. The worry here is that someone else will give them the money. For instance, one of your big competitors might acquire the small competitor and scale up its product to compete with you. To prevent that, you can pretend to buy the small company: You show up, you offer a great price, you sign a letter of intent, you get a few months of exclusivity, your big competitors can’t buy the small company, and you don’t have to either. You’ve just frozen them out of competing with you while negotiations drag on.

Both of these sound a little far-fetched, but we have talked about alleged examples. In 2024, Propel Fuels Inc. accused Phillips 66 Co. of doing the first thing, pretending to want to buy Propel to steal its ideas and customers in due diligence. (Propel won its lawsuit.) And last year Pfizer Inc. accused Novo Nordisk A/S of doing the second thing, pretending to want to buy a small weight-loss biotech called Metsera Inc. to prevent Pfizer from actually buying it. (Novo dropped its bid after antitrust regulators raised questions.)

Here’s another alleged case, from a lawsuit filed earlier this month. Planet Networks Inc. is a fiber internet company in New Jersey. “In recent years, it has strived to expand its business beyond its New Jersey roots, … especially [to] rural areas in New York that have little to no existing fiber infrastructure, such as the Hudson Valley.” It needed some financing to do that. It got an offer for $100 million of equity financing from one investment firm. But then it got another offer for $50 million of debt financing from another investment firm, Post Road Group.

Post Road’s deal was better, but it “had a wrinkle”: Post Road “had publicly committed hundreds of millions of dollars to ... Archtop [Fiber LLC], a newly-formed fiber Internet startup that staked virtually its entire business on being the first fiber provider in the Hudson Valley.” Planet was skeptical, but Post Road assured it that it was no problem. So Planet signed a term sheet with Post Road, in which Post Road gave it a $12 million bridge loan and also agreed to exclusively negotiate the full $50 million investment. And then, Planet says:

Once PRG had locked Planet into exclusivity—thereby tying Planet’s hands so that it could not negotiate with other lenders and was thus entirely dependent on PRG for funding—PRG completely changed its tune. In a shocking about-face, PRG immediately began improperly demanding that Planet cease its expansion efforts in New York for Archtop’s benefit. For instance, PRG even went so far as to wrongly demand that Planet hand its New York asset, Fiberlinc, over to Archtop to aid Archtop in establishing a New York presence. PRG made clear that Planet could not obtain the promised funding from PRG unless it capitulated to these wrongful demands.

Moreover, PRG proceeded to slow roll Planet and bombard it with an endless stream of burdensome and often irrelevant requests under the guise of conducting diligence. As Planet and Mr. Boyle later discovered, the purpose of these requests was not to conduct “diligence.” And PRG was not implementing strict information walls between Fund II (Planet) and Fund I (Archtop). Shockingly, not only was [the same PRG managing director] leading PRG’s investments in both Planet and Archtop—a clear breach of PRG’s obligation to implement information walls between the two investments—he was also taking Planet’s confidential information and directly feeding it in real time to Archtop so that Archtop could exploit it for its own benefit. Over time, it has become clear to Planet that PRG’s “investment” in Planet was no investment at all. Instead, it was a scheme … to sabotage Planet’s expansion into New York and steal its trade secrets, including proprietary, non-public, and competitively sensitive information relating to its permitting maps, technologies, business opportunities, and vendor relationships that [Planet] has spent decades developing (the “Trade Secrets”).

A little of both, allegedly: a pretend investment to stop someone else from investing in Planet, and to get enough information to compete against it better. The lesson is, I guess, watch out for fake takeovers.

I frequently joke around here that the one thing standing between humanity and super-intelligent robots that will usher in a paradise of abundance, and/or enslave and murder everyone, is, like, copyright law, or insurance pricing. That is: We have some legal and financial technologies that are adapted to our existing world, and those technologies are not well suited to the development of artificial superintelligence, and so even if the AI utopia/dystopia is possible as a matter of human ingenuity and computer technology, it is prevented by our legal and financial technologies.

This is kind of a joke, but also kind of an ode to the unsung importance of legal and financial technologies. “Why shouldn’t the greatest peaks of human achievement be the results of tax structuring,” I once wrote: Humanity’s achievements are limited only by our imaginations and also our regulatory regimes.

Anyway, at the Financial Times, Huw van Steenis writes that Europe can’t develop artificial superintelligence because it has the wrong treatment of securitizations for insurance capital regulation:

Europe’s ambitions to build out artificial intelligence, data centre and energy infrastructure are colliding with an awkward — and familiar — financing reality: the continent lacks the depth of long-dated investment capital needed to fund them. ...

A key part of the problem is that insurers — the natural buyers of senior securitised tranches — have been straitjacketed by Solvency II capital rules which came into effect in 2016. European life insurers currently hold just 0.4 per cent of their portfolios in securitisations, compared with 17 per cent for their US peers. While well intentioned, the unintended consequence of Solvency II is Europe’s largest pool of patient capital is severely curtailed.

Yes.

That said! You could write a science fiction novel with the opposite premise. Something like: We have various legal and financial technologies that are adapted to our current world, but those technologies are themselves increasingly being run by AI, and if the machines become superintelligent and evil, they will naturally collude to use the financial and legal systems to advance their dreams of a robot takeover. For instance, what if insurance pricing is not the one thing standing between humanity and super-intelligent killer robots? What if insurance pricing is controlled by AI, which will use it to usher in the killer robots? Bloomberg’s Edward Ludlow reports:

Insurance provider Lemonade Inc. is rolling out automotive policies for users of Tesla Inc.’s driver-assistance system, seeking to capitalize on interest in the technology.

The new plans will cut per-mile rates by about 50% when customers have Tesla’s Full Self-Driving system engaged, Lemonade said Wednesday in a statement. The decade-old insurance firm, which uses artificial intelligence to price policies and process claims, will begin offering the option to Tesla drivers in Arizona this month before expanding to Oregon in February.

Lemonade says the lower rates reflect “what the data shows to be significantly reduced risk” when the system Tesla markets as FSD is engaged, echoing claims made by Tesla Chief Executive Officer Elon Musk. Comprehensive safety data for driver-assistance technology is limited, and FSD is under investigation by the US National Highway Traffic Safety Administration over numerous incidents in which vehicles violated traffic laws.

I’m kidding, probably. But it is a little convenient that the AI insurance likes the AI cars so much.

TACO reflexivity. Trump’s Push to Fire Fed’s Cook Runs Into Skepticism in Supreme Court Hearing. Race to Unmask Insider Bets in Prediction Markets Is Heating Up. Nvidia CEO Says AI Will Create Jobs For Electricians and Plumbers. Colleges Are Letting AI Bots Help Make Decisions on Who to Admit. Chevron’s Dilemma in Venezuela: Support Trump’s Vision Without Losing Money. Halliburton and Its Rivals Can’t Wait to Get Back Into Venezuela. Quants in Worst Drawdown Since October as Crowded Bets Buckle. Why Elon Musk Is Racing to Take SpaceX Public. Trump coin price plunges 94% in a year as memecoin frenzy fades. Vape Firm That Boasted of $1 Billion in Revenue Sold for £76,500. “Trump earlier this month called for a one-year, 10% cap on credit card rates to go into effect on Jan. 20, a deadline that came and went without noticeable changes from the industry.”

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