After incurring the wrath of shareholders over his company’s iPhone subsidy deal with Apple, Sprint CEO Dan Hesse has returned $3.25m in pay. Guy Daniels reports.
It’s not wise to upset your shareholders. Most times you can nod and sympathise with their concerns at shareholders meetings, then carry on regardless when they’ve left. But eventually they’ll force you to listen and do what they say – after all, they own the company, and they don’t like their CEOs running it as their own private venture (unless of course, it’s making a bucket load of money and paying juicy dividends, in which case the shareholders will bite their tongues and pocket their cash).
Dan Hesse, CEO of US mobile carrier Sprint, was forced to listen to his shareholders this month. They were more than a little unhappy that Sprint’s executive management had excluded the financial effect of carrying Apple's iPhone when calculating employee bonuses. As a result, Hesse has returned more than $3.25 million of his pay in compensation.
This all stems from Sprint’s decision back in October 2011 to join the iPhone party, having seen rivals AT&T and Verizon apparently reap dividends from their alliances with Apple. The Wall Street Journal reported at the time that unnamed sources claimed Sprint must commit to purchasing over 30 million iPhones from Apple over a four-year period, regardless of whether or not they are actually sold.
Sprint soon acknowledged that it had a four-year contract with Apple in which it would commit to buy an unspecified number of iPhones, which Sprint estimated will cost the company about $15.5 billion, although it will begin to make money on the iPhone by 2015. It added that its cost per new iPhone subscriber would be 40 per cent higher than for the average non-iPhone customer, but this higher iPhone subsidy would be offset by improved customer retention and better use of Sprint’s 3G network. Hesse said at the time:
“The No. 1 reason why customers churn off our network is ‘no iPhone’, and we believe the reason why most don’t try Sprint is no iPhone.”
However, despite selling nearly 2 million iPhones in the last quarter of 2011, Sprint's wireless margin fell to 9.5 per cent, down from 16 per cent in the previous year. The company acknowledged in February this year that its margin was “significantly lower” than it would have been without the iPhone subsidy. Yet Hesse was reported by CNN as saying that he expects the iPhone will (eventually) be “our most-profitable device”.
Fast forward to May 2012, and the iPhone deal has returned to hit Dan Hesse where it hurts most – his wallet. Sprint announced that it had sold 1.5 million iPhones in the first quarter of 2012, with 44 per cent of those sales going to new customers.
But the subsidies remain – and their effect was excluded from pay rise calculations to employees, including CEO Dan Hesse.
The Kansas City Business Journal, the local newspaper to Kansas-based Sprint, first reported the shareholder unrest and subsequent US Securities and Exchange Commission (SEC) filings. In a letter sent last Friday to Sandra Price, SVP of Human Resources at Sprint, Hesse wrote:
“The Company has received feedback from some shareholders relating to the discretionary adjustment the Compensation Committee made under the incentive plan payouts for the impact of the iPhone on our financial results. I do not want … to penalize Sprint employees for the company’s investment with Apple, so I will forego this adjustment to my compensation.”
He will repay various “discretionary adjustment” made by the Compensation Committee in February, and has lowered his “target opportunity” incentive plan for this year, which will total $3,250,830. Sprint chairman James Hance then issued a statement to the SEC confirming Hesse’s decision:
“We applaud Dan for his willingness to sacrifice personal compensation in order to reduce any distraction that could negatively affect the morale and performance of the company. Dan enjoys the full support of our board of directors and we appreciate the leadership he has demonstrated as he continues to guide the company through a turnaround in a difficult competitive environment.”
iPhone subsidies are costing US carriers dearly. In an interview with Bloomberg, UBS analyst John Hodulik said rival telco Verizon may sell 13 million iPhones in 2012 with an estimated $400 subsidy per unit, adding up to a total of $5.2 billion: “You basically write customers a $400 check”. James Ratcliffe, analyst with Barclays New York, was more cautious on the numbers, but still thinks Verizon will sell at least 9 million iPhones with a subsidy of about $350 per device.
There are wider implications to this iPhone subsidy story. Carriers aren’t in the business of losing money; they certainly wouldn’t write of $400 per new phone sale if they didn’t have to. It’s only the phenomenal popularity of the iPhone that is causing this pain. But the carriers are fighting back. For example, Sprint has doubled the fee it charges its customers upgrade their phones to $36, in an attempt to discourage users from upgrading their phones too often (or benefiting financially if they do). It, along with the other US carriers, is also increasing monthly data subscription rates, offering less for more money. If all the carriers do the same, there’ll be less fear of customer churn.
After all, they need to recoup their $350-$400 iPhone subsidies somehow. And how long before the follow the example of European telcos such as Telefonica, who no longer subsidize handset costs to new customers?
Finally, before you shed a tear and worry about how Mr Hesse will pay the mortgage and feed the family, having returned $3.25m, we don’t think he’ll be on the breadline any time soon. According to the local Kansas paper, Hesse’s base pay remained unchanged at $1.2 million in 2011, but his total compensation increased 31 per cent to $11.9 million.
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