Palo Alto Networks Shareholders Oppose Executive Compensation For 2018

Stockholders at Palo Alto Networks have taken the highly unusual step of overwhelmingly objecting to the compensation given to the company's top five executives in the 2018 fiscal year.

During Palo Alto Networks' annual meeting Friday, only 17.1 percent of shares voted in favor of the platform security vendor's executive compensation plan, with 63.7 percent of shares opposed to an arrangement that resulted in more than $125 million of total compensation for incoming CEO Nikesh Arora. Arora spent just 39 business days as CEO of Palo Alto Networks during the firm's 2018 fiscal year.

Some 18.9 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 only 0.03 percent of shares abstained from the vote. The company's revenue climbed by 29 percent in fiscal 2018 to $2.27 billion, while GAAP net loss improved by 31.7 percent to $147.9 million.

[Related: Palo Alto Networks Taps Longtime Google Leader Nikesh Arora To Be Next CEO]

"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 (SEC).

Arora's compensation package for Palo Alto Networks' 2018 fiscal year, which ended July 31, included more than $65 million worth of option awards and $59 million of stock awards. His total compensation of $125.1 million is higher than every single IT vendor executive examined as part of a March 2017 CRN report, including tech luminaries such as Sundar Pichai, Larry Ellison, Meg Whitman, and Marc Benioff.

Palo Alto Networks said it sought to provide Arora with compensation that was competitive with the market and provided long-term incentives for achieving market capitalization and financing operating objectives. The company said it also considered that Arora had been one of Google's highest paid executives, and had received substantial compensation while serving as SoftBank's president and COO.

"Our compensation committee identified Mr. Arora as a candidate with unique vision and leadership qualities that it is confident will take us to the next level, and created a compensation package that rewards him if he is successful in doing so," Palo Alto Networks wrote in the Oct. 22 proxy filing.

Arora received significant new hire awards as part of Palo Alto Networks' efforts to recruit him, according to the company. Arora's compensation is nearly nine-times higher than outgoing CEO Mark McLaughlin's compensation during any of his final three years at Palo Alto Networks.

In addition, Palo Alto Networks agreed in October to give incoming President Amit Singh the opportunity to earn $10 million of stock awards and $24.5 million of option awards. Singh worked alongside Arora at Google between May 2010 and December 2014.

Palo Alto Networks did not immediately respond to a request for additional information. The result of the vote was announced after the market closed Tuesday, and Palo Alto Networks stock remained unchanged at $184.42 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 (55 of 2,028) of Russell 3000 companies having their compensation proposals rejected so far this year, according to an Oct. 4 analysis from executive compensation consulting firm Semler Brossy. The Russell 3000 tracks the performance of the 3,000 largest U.S.-traded stocks.

This year's rejection of Palo Alto Networks' executive compensation plan was a dramatic departure from 2017, when more than 94 percent of the votes cast approved of the plan. Palo Alto Networks executive compensation plan for last year, though, didn't pay any one executive more than $10.4 million.

Only Malvern, Penn.-based investment advisory firm The Vanguard Group owns more than a 5 percent stake in Palo Alto Networks. Among current executive offices and directors, only Founder and CTO Nir Zuk owns more than a 1 percent stake in the company, according to the proxy filing with the SEC.

Palo Alto Networks' compensation committee in fiscal 2018 reviewed compensation 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, Tableau, and Workday, the filing indicated.