Netflix Exec Bonuses Were a Sham to Capitalize on Tax Deductions, Shareholder Lawsuit Says

City of Birmingham Relief and Retirement System suit says the more than $18 million paid to top management is “unwarranted compensation”

In a lawsuit filed by a Netflix shareholder, Netflix’s board of directors have been accused of giving top managers undeserved bonuses in order to capitalize on federal tax deductions.

The lawsuit, brought by the City of Birmingham Relief and Retirement System against board members including CEO Reed Hastings and CFO David Wells, claims bonuses were paid to managers under the pretense of rewarding good performance, but benchmarks were low enough to essentially make them a guarantee.

Under U.S. tax law prior to the cuts passed in December, bonuses for employees earning a salary of more than $1 million must be performance-based in order to qualify for a federal tax deduction. Further, performance goals must be “substantially uncertain.”

The shareholders’ suit accuses the board of “breaches of fiduciary duties of loyalty, good faith, and candor arising from the disloyal and dishonest management of Netflix’s Performance Bonus Plan (the “Plan”), in order to pay Netflix’s top officers unwarranted compensation.”

Netflix leadership met their goals in seven out of eight quarters leading up to July 2017, meaning top officers were paid approximately $18.73 million out of the $18.75 million set aside in a target pool. The complaint notes that the targets were missed by one percentage point in the other quarter, referring to the behavior as “artificial precision.”

“Through their conduct, Defendants rigged the compensation process, guaranteeing Netflix officers huge cash payments while misleading investors into believing that these payments were justified by attainment of real performance goals,” the complaint reads.

The shareholder derivative suit allows shareholders to sue on behalf of the company, given that the board “has not, and will not, commence litigation” against its own directors. The complaint says shareholders making a demand of the board prior to filing suit would have been “a useless and futile act.”

In addition to damages and a new system of corporate governance to prevent such action in the future, the lawsuit also demands that defendants give back “all compensation and remuneration of whatever kind paid by Netflix during the time that they were in breach of the fiduciary duties.”

Pamela Chelin contributed to this report.