Yahoo goes to the mat to keep Semel

Semel, a former Hollywood studio executive, was viewed by many industry observers as a strong candidate in Disney's search to replace its embattled CEO, Michael Eisner.

Terry Semel

"There is...recognition that Mr. Semel's unique skills, experience spanning the Internet and media industries, and repeated past success make him an attractive candidate to competing organizations," stated Yahoo's proxy filed Monday with the Securities and Exchange Commission. "Consequently, (Yahoo's) compensation committee took aggressive action in 2004 to retain Mr. Semel."

Yahoo's board offered to ratchet up Semel's compensation from the middle-of-the-road range for CEO pay to the "top quartile" of major global companies. That increase, which will largely come from stock grants, will occur only if Semel can push the company into the top quartile for "shareholder value creation."

Under that program, Semel received a retention option to purchase 2 million shares of the company's stock. Although the options would normally vest in four years, the schedule can be accelerated where half could be exercised by the end of this year and the remainder at the end of next year--should Semel meet certain performance criteria. He also received 250,000 restricted shares, in which all restrictions lapse after the third year.

For Semel, Yahoo options have been lucrative. Last year, he exercised $230 million in options and had nearly another $324 million that were vested but not touched, according to the proxy.

Semel's base pay of $600,000, which is considered low in comparison with other companies, was not increased last year and will not be increased this year, the proxy stated. Yahoo's board noted in the securities filing that they preferred to place a heavy emphasis on long-term incentives through stock, rather than cash bonuses.

The Internet giant did just that last year when it awarded Semel 7.2 million options valued at $108.7 million. Some of the shares were fully vested, while others were subject to accelerated vesting schedules or a traditional schedule that spans four years.

"The compensation committee noted in particular the strengthening of the company's core business, including premium services and advertising, the completion of a number of strategic alliances and acquisitions both domestically and internationally?and the company's enhanced financial and stock performance," the proxy stated.

While Yahoo's stock performance improved, it still lagged behind Standard & Poor's 500 index and the Nasdaq composite index.

A shareholder investing $100 in the S&P 500 five years ago would find it was worth $82.49 at the end of 2004. But a similar investment in Yahoo would be worth $34.83.