Bitcoin Miners’ Excessive Comp Prompts Shareholder Concern
August 29, 2022
Read Time 8 MIN
Please note that VanEck has exposure to Bitcoin.
RIOT Shareholders Vote “No” to CEO’s Comp Package
In the just-completed 2022 proxy season, shareholder opposition to directors rose again, particularly on the issue of executive compensation. Average voting opposition for executive compensation chairs, for example, rose to 7.29% in 2022 vs. 5.7% in 2021 and 3.8% in 2017.1 In addition, average support in nonbinding votes on compensation dipped below 90% for the first time since 2017.2 In particular, this most recent proxy season has sparked a debate regarding executive compensation in the digital assets community. The industry operates under a unique set of competing pressures between long-term performance and short-term volatility. These factors, in combination with its fast-moving, high-risk and high-growth nature, have resulted in a lack of consensus surrounding executive compensation for bitcoin mining companies—and some fireworks!
Ahead of RIOT Blockchain’s Annual General Meeting on July 27, the largest U.S. bitcoin miner by revenue faced opposition to two of the five proposals slated by management on its proxy voting ballot.3 Specifically, at least one of the major proxy advisory services companies recommended voting against management’s proposals for the Advisory Vote on Executive Compensation and amendments to the 2019 Equity Incentive Plan.
The Advisory Vote on Executive Compensation sought shareholder approval of a non-binding advisory vote on the company's executive pay package. Total pay for the five named executive officers was proposed, including $21.9M for the CEO and just under that ($21.3M) for the executive chairman. Even the lowest paid named executive, the general counsel, was set to receive $13.2M.
Notably, these substantial sums were tied to milestones and annual goals with multiple measurement windows, including a performance measurement period for long-term awards that was less than three years. The compensation plan also did not disclose performance-based short-term awards or relative metrics to evaluate performance, and the annual bonuses were left uncapped. Meanwhile the proposal request to amend the 2019 Equity Incentive Plan requested 10,000,000 shares, which is 8.57% of outstanding shares and would have potential dilution ramifications of 7.89%.4 Since VanEck owns shares of RIOT in our Digital Transformation ETF (DAPP) and Digital Assets Mining ETF (DAM)—7.73% and 7.50% of net assets, respectively, as of 8/24/2022—we voted on these actions. In the end, shareholders failed to approve the management proposal on executive compensation.
Examining Executive Compensation in the U.S. Bitcoin Mining Industry
Given that RIOT is the largest bitcoin miner in North America, we see the lack of consensus regarding executive compensation as an opportunity to examine this issue in the digital assets industry, as well as other industries more broadly. We first examined the executive pay components for RIOT mining and its peers in order to understand how executive compensation is handled in the digital assets community in the U.S. The peer group includes the next largest publicly traded bitcoin miners in the U.S., including Marathon, Core Scientific, Cipher Mining and CleanSpark.
Using data from Harvard Business School5 and Gallagher,6 we then compared the pay components from RIOT and its peers with the energy and IT industries in the U.S. as well as the Russell 3000. We chose energy and IT as they are the industries that digital assets are most often compared to, while the Russell 3000 provides a benchmark for the entire U.S. stock market. Compensation factors were analyzed across the named executive officers (NEOs) for companies, which include the chief executive officer (CEO), chief financial officer (CFO), and the three most highly compensated executive officers for a company, in order to provide an accurate analysis of executive compensation.7
Total Direct Compensation Higher for Bitcoin Miners
First, we compared the following compensation factors: the base salary, annual bonus, stock options, total long-term incentives (LTI, which includes stock options and other factors) and total direct compensation.8
Our analysis reveals that RIOT and its peer group granted enormous NEO awards last year relative to the standard for the energy and IT industries as well as the Russell 3000. While the salary figures for RIOT and its peers were lower than its benchmarks, the total long-term incentives awarded were significantly higher, which contributed to much higher NEO total direct compensation. These more excessive executive compensation practices (amongst RIOT and its peers) might lead to pressure on peer companies in the digital assets industry to provide similarly large awards, in the absence of shareholder pushback.
Compensation Factors for NEOs – Median
Sources: Gallagher, DEF14As (2022). The median compensation factors for NEOs for RIOT and its peers compared to the energy and IT industries as well as the Russell 3000.
Miners Favor Variable Compensation Over Fixed
Our analysis reveals that executive compensation for RIOT and its peers includes variable compensation as a higher share of total compensation relative to the energy and IT industries as well as the market as a whole. This relatively high variable component lessens the blow of the outsized overall compensation, in our view.
|Base Salary (%)||Annual Bonus (%)||Total LTI (%)9|
|RIOT and Peers||1||3||96|
Sources: Gallagher, DEF14As (2022). The average share of base salary, annual bonus and total LTI for NEO compensation for RIOT and its peers compared to the energy and IT industries as well as the Russell 3000.
Short-term Compensation Common Among Miners
Our analysis reveals that RIOT and its peers include a significant level of short-term awards, which may be higher than the norm for the energy and IT industries.
All but one of the companies in the bitcoin mining peer group included as-achieved equity vesting for CEOs, which distributes special equity awards as soon as a goal is achieved. Further, the total time horizon for time-vesting awards (without performance conditions) were all within three years for these companies, compared to the three-year floor that is all but the norm in the U.S. market. Grants with short vesting periods and without features like minimum vesting requirements for as-achieved performance criteria can be less effective for long-term retention. Especially given the size of these awards, the short vesting periods may raise concerns for this peer group in spite of the industry’s unique contours.
|CEO Special Equity Award||$19.3M||$219.8M||$160.7M||$102.4M||$11.6M*|
|As-achieved equity vesting||Yes||Yes||N/A; time-based||Yes||Yes|
|Time-vesting periods||1 year||9 months**||4 years||3 years||1 to 3 years|
* Includes regular annual equity. Specific award values and grant dates are not provided. Excludes $2.5M in special cash awards.
** New CFO received a three-year grant in 2022 as an Initial Executive Award.
Sources: DEF14As (2022), annual reports (2021). Short term compensation factors for RIOT and peers.
Miners Executive Comp Yields More Equity Than Cash
Our analysis reveals that RIOT management and its peers will receive a higher share of equity vs. cash, compared to the energy and IT industries. While high proportions of equity-based pay are a favorable feature in many contexts, the structure of the grants, the time periods involved and the level of resultant dilution all contribute to a less rosy picture.
|Equity (%)||Cash (%)|
|RIOT and Peers||94||6|
Sources: Harvard Business Review, DEF14As (2022). The average share of equity vs cash components for NEOs for RIOT and its peers compared to the energy and IT industries.
Insights from Our Analysis
Overall, the factors analyzed reveal some risky behavior for RIOT and its peers with respect to compensation.
On the other hand, the unfavorable market conditions provide more context for changes made to executive compensation. The stock prices for the largest bitcoin mining companies are down an average of 84% from their peak as the U.S. market cap for crypto has fallen sharply in the last year.10 It is not unusual to reset options pricing during volatile market conditions in order to protect employees from market forces that are outside of the company’s control. Whether the awards are best designed to keep steady hands at the helm of these innovative companies in a less favorable or more volatile market is a fair question.
Further, it is common for companies to emphasize short-term awards when they want to encourage aggressive adaptability. Many fast-growing firms provide high compensation relative to the broader industry and especially relative to more established business lines. After all, there are fewer executives that are adept in navigating the intricacies of digital assets than there are business leaders that can manage traditional manufacturing operations. Since the digital assets industry is nascent and fast-evolving, these short-term awards may be more qualified than one might perceive at first-glance. Still, seeing eight-to-nine figure sums for the leaders of firms that have yet to make a profit may be discomforting in any industry.
Thus, in the case of RIOT, shareholders did not approve the Advisory Vote on Executive Compensation at the Annual General Meeting held on July 27, whereas the amendments to the 2019 Equity Incentive Plan were approved in a binding vote.
The number of shareholder proposals surged in the 2022 proxy season, continuing the effects of the change in administration at the SEC, and the issuance of the Staff Legal Bulletin No. 14L (SBL 14L) in November 2021, which made the exclusion of shareholder proposals more difficult for companies. The number of such proposals increased by 8% from 2021,11 which is the highest number of shareholder proposals since 2016.
Reflecting the heightened awareness of bitcoin mining’s environmental impact (both real and imagined), we would expect anti-crypto forces to mobilize shareholder proposals to target executive compensation and other governance issues should they be out-of-whack with corporate norms. No doubt such developments would contribute to differences in equity multiples for these firms. We look forward to engaging further on this topic.
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5 Data reflects the average compensation of the five highest paid executives at each of the companies in the Russell3000. Data is sourced from FW Cook proprietary research.
6 Data reflects the compensation of the named executive officers in the Russell 3000 (n=2,848) or all of the companies of the energy (n=102) or IT (n=369) sectors in the Russell 3000. Data used is the median from 2016-2020.
8 Note that these are a subset of compensation factors that were analyzed and do not encompass all of the compensation factors that make up total direct compensation (and will not add up as such).
9 Figures may not sum to 100% due to rounding.
10 Bloomberg, as of 8/23/22.
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November 30, 2023
November 30, 2023
If you’re a tax sensitive investor looking for long-term exposure to Ethereum and Bitcoin futures, a fund structured as a C-Corp may result in higher after-tax returns.