Elop Conspiracy? Not So Much

If you read the news yesterday, you might have run into a few articles discussing the exit of former Nokia CEO Stephen Elop, the terms of his exit, the cost of said exit, and how he was a mole in the Finnish company determined to bring it down in flames.

Well, maybe not that last bit, but people did write it. There is some thought in the market that, perhaps, Elop (a former Microsoft employee) purposefully tanked Nokia, thus forcing a sale to an outside party (in this case, Microsoft), triggering a bundle of cash for himself. Fun to think about, but is it fair? Let’s find out.

As the Financial Times noted earlier this week, “Mr Elop’s contract – according to a 2012 SEC filing – stipulated that if he resigned after a change of control he would be entitled to 18 months of compensation and” accelerated equity vesting.

So, if Elop left the firm following a “change of control” he was entitled to a chunk of money, coming in the form of salary, management incentives, and stock. But he had to quit. The accelerated vesting portion of the above matters as, it turns out, that’s the largest piece of the total compensation package.

Nokia changed its contract with Elop at the same time that the Microsoft deal came together, essentially altering the wording so that it would allow Elop to receive the accelerated vesting without resigning. Note that in the above, Elop had to resign.

He didn’t. Instead, he stepped down from his role as CEO to become Nokia’s Executive Vice President of Devices & Services group (what Microsoft is buying). We now turn to an SEC filing to get our heads around the situation. Strap in for some dry English:

We entered into an amendment with Mr. Elop to his service contract, which became effective on the date of the Purchase Agreement. Under the terms of the amendment, Mr. Elop resigned from our Board of Directors and from his positions of President and Chief Executive Officer as of the date following the date of the Purchase Agreement, September 3, 2013.

This is as stated above: Elop had his contract modified at the time of the Microsoft deal. Nokia, below, enacts changes that to allow him to not resign, and still get the equity en masse.

What you need to get from the next two paragraphs is the nuance of the previous contract situation between Nokia, and Elop [emphasis mine]:

Under the amendment to his service contract, Mr. Elop agreed that the change in his position (described above) would not entitle him to terminate his service contract for cause under the terms of his service contract, which provide for payment of 18 months of his base salary and management short-term cash incentive (calculated at 100% of target) as well as accelerated vesting of his outstanding equity awards upon such a termination by Mr. Elop for cause.

Under Mr. Elop’s original agreement, if Mr. Elop’s service contract was terminated without cause, or he resigned as a result of a significant reduction in his duties and responsibilities, in either case within 12 months following a change of control, he would be entitled to receive 18 months of his base salary and management short-term cash incentive (calculated at 100% of target) as well as accelerated vesting of his outstanding equity awards.

Elop would get the money, however, even if Nokia didn’t sell itself, or a big part of itself, which matters, as it indicates that Elop would have been entitled the funds regardless of the sale to Microsoft (this cuts at the conspiracy theory a bit, of course):

Under his original agreement, Mr. Elop would be entitled to these same benefits if he terminated his employment for cause at any time regardless of a change of control, but would be entitled only to the same cash severance benefit (but not the acceleration of all equity awards) if his service contract was terminated by Nokia without cause prior to a change of control.

So, if Elop quit “for cause” he got the full bank account, but if he was fired by Nokia “without cause” or change of control, he only got the cash and not the stock. So, being fired would have been financially detrimental to Elop. That’s reasonable.

However, under the change of control provisions of Mr. Elop’s agreement as amended, Mr. Elop may terminate his employment on or following the Closing (and assuming he has not materially breached his service contract prior to such termination) or Nokia may terminate his employment without cause prior to the Closing, and in either such case, Mr. Elop will be entitled to receive 18 months of his base salary and management short-term cash incentive (calculated at 100% of target) as well as accelerated vesting of his outstanding equity awards.

Now, however, regardless of how Elop leaves, he gets the full accounting. Generous? Slightly, but keep in mind that the new agreement was inked at the same time the deal with Microsoft was. So, the risk here was essentially nil, with Nokia stating that Elop would be compensated as he would have if he had quit.

Here’s the bit about how much money Elop gets his hands on:

Although the actual amount of these termination payments and the value of equity acceleration will not be determined until such termination occurs, using compensation values and the Nokia closing share price of EUR 4.12 per share on September 6, 2013, and an assumed Closing Date of in the first quarter of 2014, such pro forma amounts are estimated to be approximately EUR 18.8 million in the aggregate. This amount includes: base salary and management incentive EUR 4.1 million, value of benefits EUR 0.1 million and pro forma value of equity awards EUR 14.6 million.

Who pays the tab? Interestingly, Nokia is only paying the tip, with Microsoft picking up 70 percent of the costs at hand.

Once the actual amount is determined, pursuant to the terms of the Purchase Agreement, 30% of the amount (EUR 5.65 million) will be borne by Nokia and the remaining 70% of the amount (EUR 13.17 million) will be borne by Microsoft pursuant to the purchase price adjustment mechanism described in “The Purchase Agreement—Purchase Price Adjustments” beginning on page 41. Mr. Elop is subject to a covenant restricting him from working for certain specified competitors of Nokia, provided that upon Mr. Elop’s commencement of employment with Microsoft, Nokia will waive his competition restriction as to Microsoft.

Why all the above? It’s a good question. The Financial Times has notes from Risto Siilasmaa, the chairman of Nokia’s board, explaining their thought process: “He explained why Nokia had amended Mr Elop’s contract at the same time as the Microsoft deal, saying that otherwise Mr Elop had the right to ‘call a breach if we change[d] his role considerably’”

So, bumping him down from CEO would have been an issue (he could have deemed the demotion of “breach” of contract), and (as noted in the first quoted paragraph of the filing), both Nokia and Elop felt that the move didn’t count as a resignation. So, to keep the deal train on the rails, the contract was amended to ensure that Elop got his full potential exit stash, while not forcing him to actually resign.

Note that in the above filing language, if Elop resigned, he was entitled to all the money. So, Nokia had incentive to keep the guy around. Thus, the late contract changes solved all problems: Nokia got to keep Elop until closing the Microsoft deal, Elop got all his money, and the sale had no legal hangups.

The kicker for Nokia is that it got Microsoft to finance 13.17 million Euros of the package. The equity that Elop gets as a result of not resigning and the contract shuffling is 14.6 million Euros. So, Nokia is paying Elop to stick around using someone else’s bank account. Nice trick. Microsoft has essentially unlimited foreign cash reserves, so it won’t miss the few dollars.

All the above is a boring and tedious exercise in corporate contracts. You are welcome. We now turn to the second question.

Yes, But

If the last-minute changes to Elop’s contract were boring and not impactful (except to Elop and a single Microsoft bank account), what about the supposed alleged initial sin of having performance incentives for Elop that could be triggered by a sale of Nokia itself?

We must rewind slightly: Nokia screwed up. Risto Siilasmaa (again, Nokia’s chairman), told the press that Elop’s contract was all but the same as the contract of his predecessor. That wasn’t true. It is quite likely true that the two were greatly and substantially similar, but, there was a key difference: Elop gets quite a bit more money than his predecessor would have in similar circumstances.

In fact, if I have this straight, the CEO before Elop would not have been entitled to the quick vesting in the event of a sale, change of role, resignation, or breach of contract by Nokia. So, Elop is doing better than the guy before him would have in the event of a sale of Nokia, and would have come out ahead – again, it appears – in other circumstances, as well.

This is where the conspiracy cranks to over 9000: Nokia baked financial incentive into Elop’s contract should he sell the company. Therefore, didn’t it incentivize him to sell the company? Oddly, not really. Recall this: “Under his original agreement, Mr. Elop would be entitled to these same benefits if he terminated his employment for cause at any time regardless of a change of control.”

The man had the same bucket of cash if he checked out without selling a damn thing.

It appears instead that the sale of the company was one of several contingencies that were discussed as potentialities, and Elop wanted to have his financial ass covered for all of them. The dollar amount, please recall, ain’t that much: $25 million or so between two companies moving more than $7 billion across the table is crumbs. And Elop will be taken care of in Redmond as well, where he might become the new CEO.

So, to believe that there is a material conspiracy at hand you have to believe that Elop negotiated his contract at the start of his tenure as CEO of Nokia with the aim in mind of fucking the company, that he wanted a clause that would allow him to hurt Nokia until it was sold off, so that he could pocket $25 million.

Kicker: He was a well-paid CEO. Note that his salary as listed above for an 18-month period was 4.1 million euros. Kill the company for another 13.7 million euros that he would have received to boot if he had stayed or quit? It just doesn’t feel reasonable.

Misplaced Anger

So much of the vitriol toward Elop concerning the payment appears to be misplaced anger: People are utterly pissed at the decline of Nokia as a global smartphone power, and they place that blame on Elop. Therefore, for him to receive a single damn dime is too much for them.

And, as most folks don’t take the time to dig into the weeds to uncover the details, it appeared to some that he was being bought off for selling the local corporate crown jewel.

When Elop came to Nokia, he released the now famous (infamous?) Burning Platform memo that essentially stated that if Nokia didn’t dramatically change its operations, it would die. Full stop. Dramatic language? You bet:

I have learned that we are standing on a burning platform. And, we have more than one explosion – we have multiple points of scorching heat that are fuelling a blazing fire around us. […]

While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. At that time, we thought we were making the right decisions; but, with the benefit of hindsight, we now find ourselves years behind. […]

We have some brilliant sources of innovation inside Nokia, but we are not bringing it to market fast enough. We thought MeeGo would be a platform for winning high-end smartphones. However, at this rate, by the end of 2011, we might have only one MeeGo product in the market.

It was almost brave in its stern condemnation of Nokia’s market position and prospects. Elop and the company’s board eventually picked Windows Phone as their future platform, a decision that brought with it a huge amount of Redmond cash. Nokia now controls around 90 percent of the Windows Phone market, which could hit 10 million devices in the fourth calendar quarter of 2013.

Nokia is diminished, and will now be snapped into pieces and sold off. Fallen giants don’t always die as a unit; in this case, Microsoft is buying body parts instead of a corpse. I bring all this up to indicate that Elop didn’t act in a manner that befits the idea that he was out to hurt Nokia.

That would have been simple: Do nothing and watch it die.

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To sum, the recent contract changes to Elop’s deal with Nokia were to prevent breach, and not force him to resign before exiting to Microsoft. Microsoft is bearing nearly all the financial burden of the change. And, Elop had a better (in personal financial terms) contract than his predecessor that covered multiple contingencies, including a sale of Nokia.

There is not much else to say.

Top Image Credit: Sam Churchill