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A Stock Performance Plan of The Future?

Axon’s Plan Tests Employees’ Tolerance for Risk

When entering Axon Enterprise Inc. headquarters, one can’t help but feel like they’ve stepped into a time machine.

Once inside the Scottsdale, Ariz.-based facility, the automatic doors close on the desert backdrop behind you as a stunning array of lights come on in a stainless-steel circular room. A neon-lit video screen instructs visitors to press a button to be greeted by the front desk and gain access into the building. Once clear, the circular room opens in half again, but this time in front of you and your eyes settle on a vast, futuristic workplace that feels more like the Star Trek space station than an office. Your eyes are riveted by an array of visuals. The wide staircase spanning three levels that’s connected between two sides of the building by a walkway. Underneath the walkway, a video screen showing images of a rover landing on the Moon and views of Earth in between banners that say, “WE ARE AXON” and “ACT NOW.”

There are soundproof meeting pods that look like life-size iPhone plugins with glass doors. It’s an intentionally open workspace so ideas can be heard and generated at this law enforcement technology company formerly known as TASER.

The innovation happening all around you is palpable.

So, perhaps it should come as no surprise that this is the birthplace of a compensation plan that boldly goes where no others have gone. Axon’s eXponential Stock Performance Plan (XSPP), which received shareholder approval in February, is believed to be the first of its kind, allowing employees to opt into the same plan as CEO and founder Rick Smith.

The plan, which was presented to roughly 500 eligible U.S.-based employees in December, guaranteed that each one of those workers received 60 special eXponential stock units (XSUs) in January. All U.S.-based employees who make more than $100,000 in on-target earnings (OTE) were also eligible to put from 5% to 50% of their compensation package into the plan. More than 300 chose to do so in hopes of a lavish payout several years down the road that is dependent on the company and the stock market’s performance. In total, employees chose to allocate about $75 million of guaranteed compensation during the next nine years into at-risk performance-based XSUs.

The plan is modeled after Smith’s own compensation plan, which he announced in February 2018. In 2017, Smith’s regular salary was $350,000 and his total target direct compensation was $2.054 million. His salary was reduced in 2018 to $24,000 pursuant to his participation in the CEO Performance Award, according to a filing with the U.S. Securities and Exchange Commission. Smith could net $1 billion if all the milestones in the 10-year plan are reached, which will be paid out in restricted stock options, while his employees would be paid in stock. What sparked Smith’s plan to begin with was the compensation plan Tesla announced for its CEO, Elon Musk, in 2018. Shortly thereafter, the chairman of the compensation committee for Axon’s board of directors, Hadi Partovi, approached Smith about the idea.

Smith’s plan, while initially greeted with well wishes from his management team and others in the company, created an environment that made the longtime CEO uncomfortable. It prompted him to quite literally spread the wealth.

“When we first did it just for me, it created a really weird us-and-them dynamic between me and the rest of the management team,” Smith said. “There was this awkwardness and I felt a little bit like a man on an island. By addressing the issue, they were appreciative that I was going to bat for them. And when we passed it in December, I was literally getting hugs from my management team. For all these people, this could be transformative startup wealth, so there’s an opportunity for this to be a life-changing plan for over 100 people.”

A Truly Unique Plan 

Bryan Wheeler is no stranger to the tech world. Axon’s Seattle-based vice president, of Axon Records — a new product coming to market this year — started with the company two years ago after leaving a startup. Before that, he worked in similar product management and engineering roles at Amazon Inc. and Microsoft Corp.

Wheeler’s experience at a startup made him keenly aware of stock- and performance-oriented compensation plans. So, when the XSPP was initially rolled out, he was skeptical.

“Venture-backed startups are honestly, in a lot of cases, pretty bad deals for employees,” Wheeler said. “Venture capitalists can structure the option pool in such a way that VC’s get their money first, but you may or may not get yours as an employee. It’s highly asymmetrical.”

However, the more Wheeler analyzed the plan, the more appealing it became. What stood out most, Wheeler said, was the option he and other employees were given when it came to contribution level.

“I thought that was super attractive, because you only get to work one job at a time. You can’t really have a personal portfolio of working at two startups and three mainstream companies, so it’s pretty hard to diversify that risk as an individual,” said Wheeler, who opted into the plan. “But this, I think, was truly innovative in the way it gave employees the ability to turn that dial up with ‘how much risk do I want to take on all of that?’”

Barbara Baksa, executive director for the National Association of Stock Plan Professionals (NASPP), said Axon’s plan is truly unique.

“I’ve never seen another plan like this extended on a broad basis to a lot of employees,” said Baksa, who’s spent more than 20 years in the stock compensation business.

“I’m familiar with the Elon Musk plan and I’ve just never seen anything like this on this scale,” Baksa said. “It’s really rare for companies to offer performance vehicles below the senior executive level.”

How rare? According to NASPP’s “2016 Domestic Stock Plan Design Survey,” co-sponsored by Deloitte Consulting LLP, only 24% of companies offer performance awards at the middle management level. That figure drops to 11% when it involves exempt employees and 3% when it’s nonexempt employees.

A Recruiting Advantage

Shortly after Axon announced its XSPP plan, Smith had another rabbit up his sleeve. The plan had already been utilized as a key vehicle to lure Hans Moritz, a top-tier tech talent, away from Silicon Valley. In February, the company announced the hiring of Moritz as the vice president of hardware research and development.

Moritz, whom Smith described as a “design guy who is also an engineering leader,” was the vice president of the new devices group and general manager of industrial design at Intel. Prior to joining Intel in 2013, he was senior director of design and brand at Oakley, where he led design for the watch, goggle, military and men’s sunglasses divisions.

Smith and Axon unsuccessfully tried to lure Moritz away from Intel a year earlier. Once Smith brought the XSPP option to the table in December 2018, it was enough to persuade Hans and his wife, Lori, to leave Northern California for the Arizona desert.

“That’s what brought me and my wife over the edge,” said Moritz, who has two young sons as well. “It couldn’t just be a straight-across job/compensation scenario. That just wouldn’t work — it doesn’t make sense. But you add the XSPP in there and now you have the great confidence. That’s the kind of thing that makes people make that jump.”

Moritz is Axon’s poster boy for XSPP when it comes to recruiting, a primary benefit of the bold compensation plan. Axon anticipates the high-risk, high-reward plan will be a tremendous recruiting tool for the kind of top-level talent it’s seeking — which could boost the company’s ability to hit the plan’s milestones.

“It’ll truly help us recruit the people that are after the same things we’re after,” Wheeler said. “Particularly if you think about folks that are mid-career. It’s one thing to go join a startup when you’re 23 years old and fresh out of college where your responsibility profile in life is quite a bit different. When I joined a startup, I had four kids, I had a mortgage — that’s a pretty daunting thing. It allows us to tap into a group of folks who do want to take on more risk but can’t go all the way to the startup end of the spectrum. I think there’s a big swath of those folks who are looking to take on a bigger risk than they can at an Amazon or Microsoft.”

Moritz said he’s in the process of recruiting fellow Silicon Valley talent to Axon and he’s found that, not unlike his situation, the XSPP is a key driver in luring talent.

“Had I reached out to them and said, ‘Hey, I would love for you to come work for us on this new mission, and by the way, it’s going to pay a little bit less because of the cost of living and it’s in the middle of the desert, but hey, it’s a great mission and a great company,’ that’s a really hard sell,” Moritz said. “But when I say to them, ‘I can match in at least cost of living in terms of compensation that you’re currently getting, but in addition to that I can offer up an XSPP program that gives you the same type of long-term possible payout that attracted me to the company,’ then I can already see a shift in their thinking.”

Designing XSPP

Designing any effective compensation plan is a complex task. Designing a compensation plan that has no precedent is downright daunting.

“There was trepidation, because it had never been done before, so we knew we were headed into uncharted waters,” said Gretchen Mastellon, Axon’s senior vice president of people operations.

To pull it off, Axon partnered with a Global 50 law firm Goodwin Procter, used outside consultants and created what Mastellon called a “cross-functional strike team” consisting of legal, people operations and finance. Mastellon said they were told in the beginning stages of Q4 2018 by a couple outside agencies and law firms that developing the plan was a six-month endeavor. However, the leadership team was hell-bent on presenting the plan before the holidays. After “many late nights,” the strike team was able to unveil the plan on Dec. 19, 2018.

A key hurdle in the process was determining a threshold for access to the plan. While every employee in the company received XSUs, Mastellon said the team vacillated on where to set the threshold for further opt-in — or whether they should set one at all — before ultimately deciding upon $100,000.

“We talked a lot about it, because our real concern was that we want people to have access to this, but we don’t want people putting their livelihood at risk,” Mastellon said. “We felt a moral obligation to draw a line in the sand somewhere.”

Once the plan was rolled out, the next step was educating and informing employees who had interest in enrolling. Axon put together an FAQ page, created a Slack channel for open Q&A and held office hours with people in HR and finance. Smith even filmed a couple web-cam sessions explaining the inherent risk of opting into the plan.

“They needed to understand the money that they put into this, they would likely not see any returns for five years, and that the returns could be zero if something negative impacted the business and we didn’t achieve the minimum growth targets,” Smith said. “So, we were really careful to balance my enthusiasm with some really clear and stark risk warnings.”


Inherent Risk

For the plan to fully succeed, Axon must combine 12 market cap milestones with 12 business performance milestones tied to revenue and profitability (See Figure 1.).

The market cap milestones start at $2.5 billion and rise $1 billion per milestone until the market cap reaches $13.5 billion. The revenue milestones begin at $710 million of annual revenue and the profitability milestones begin at $125 million of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Axon has exceeded the first market cap milestone, but Smith and the employees will not earn any stock until the company reaches either the first revenue milestone or the first profitability milestone.

For reference, Axon reported revenue of $420 million in 2018. Adjusted EBITDA was $61 million.

There’s plenty of inherent risk that goes along with this, Baksa said. Aside from the obvious financial risk involved, another is employee motivation given the front-loaded compensation structure and the nine year length. “People have short memories,” she said.

Another risk that comes with any program tied to company performance is that it could motivate the wrong behavior, Baksa warned.

“Employees could be encouraged to inflate earnings or revenue or understate expenses to achieve their goals,” Baksa said. “The CEO’s compensation for the next nine years is entirely dependent on the company’s growth in market cap, earnings and revenue and now a quarter of the company’s employees have a meaningful stake of their own compensation tied to the same goals. It will be important for Axon to have appropriate controls around this.”

Wheeler said the financial risk is rather small when compared to the startup world Axon is looking to attract from.

“Even though I’m giving up real dollars in the short term, I am still paid well with respect to guaranteed compensation,” Wheeler said. “So that is what I think is pretty unique, because generally when you go the startup route, there can be some bitter pills to swallow. There’s a couple of gap years in my 401(k) savings and my college savings for my kids, based from when I was at a startup. I didn’t have to make that trade-off with this, which I thought was pretty fantastic.”

A Promising Start

It’s March, only a few weeks removed from shareholders approving the XSPP plan, but Smith said he can already see a shift in the way Axon employees are working. He cites an example of a leader in the law enforcement sector of the business taking the initiative to work more aggressively in the non-law enforcement markets of Axon. It’s a by-product of the plan: When a large chunk of someone’s livelihood is tied directly to a company’s overall performance, the work innately becomes less narrow.

“It’s early to say this definitively, but I believe we’ve converted this from a bunch of employees to a bunch of micro-business entrepreneurs,” he said.

“I think that could have a pretty profound effect over the next few years.”

Wheeler said the plan has transformed his approach. Now that he’s locked in for nine years and has a clear goal ahead of him, his work is less about the day-today operations and more about long-term objectives.

“I think the biggest effect that it’s had is you have to start thinking about how we’re going to get to those big goals,” Wheeler said. “By default, most people tend to be incremental in the way that they think about products and about strategy and whatnot. When you give them a totally different goal, you really get some much more innovative ideas.”

Smith said when his 2018 CEO performance award plan was announced, he received many inquiries from fellow CEOs, but there was less outreach once the XSPP was announced.

The early returns at Axon have made Smith an advocate of the plan, but he’s quite all right if others are late to join the party.

“We now have 100% alignment from the board of directors, the shareholders, to me and down to the employees,” Smith said. “It’s worth the time and effort to do it in a cohesive way, and I think we’ve come up with a plan that’s a pretty good template for others to follow.

“I would just prefer other tech companies to wait a few years so I can recruit away all of their best talent before they do it.”

Brett Christie Bio Image

Brett Christie is a staff writer at WorldatWork.