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A Grand Experiment: Axon Rolls Dice with Risk-Reward Equity Plan

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More than 50% of eligible Axon employees have agreed to gamble a portion of their salary on the long-term success of the Scottsdale, Ariz.-based law enforcement technology company.

The eXponential Stock Performance Plan, presented to all eligible U.S.-based employees in December, guaranteed that every employee received 60 special eXponential stock units (XSUs) in January. All U.S.-based employees who make over $100K in OTE (on target earnings) were also eligible to put between 5% and 50% of their compensation package into the plan. The company announced Thursday that 300-plus eligible employees elected to invest a portion of their compensation for a payout several years down the road that is contingent upon the company and the stock market's performance.

Employees chose to allocate about $75 million of guaranteed compensation over the next nine years into at-risk performance-based XSUs, Axon said in a press release.

The plan is modeled after Axon CEO and Founder Rick Smith’s own compensation plan, which he announced in February of 2018. Smith agreed to relinquish his salary and get paid only if the company meets specific milestones under the 10-year plan. Smith could net $1 billion if all the milestones are reached, which will be paid out in restricted stock options, while his employees would be paid in stock.

Smith said the plan’s enrollment of more than half of eligible employees was a little higher than he expected.

“There was a lot of skepticism externally that people would opt into this because of the risk and the timeline — it’s a nine-year plan,” he said. “So, especially when a lot of our more senior technical and software leaders signed up for this, that was really a positive surprise.”

After Tesla announced its 2018 compensation plan for CEO Elon Musk, the chairman of the compensation committee for Axon’s board of directors, Hadi Partovi, approached Smith about the idea. Once the plan was put into place, Smith had interactions with employees whom he said were excited for him and eager to help him reach his goal. Smith said that made him feel like he was on an island.

That put the wheels in motion for the eXponential Stock Performance Plan.

Given Axon’s position in the tech space, most of their competitors are Silicon Valley and Seattle startups. Smith felt his compensation model, on a lesser scale, would appeal to those employees looking to take on the risk-reward profile that startups offer, but with the inherent stability and resources of a public company.

“That was really the impetus,” Smith said. “I wanted to give everyone in the company who was clearly enthusiastic about the plan I had gotten on, the opportunity to get on something very similar.”

For the plan to fully succeed, Axon must combine 12 market cap milestones with 12 business performance milestones tied to revenue and profitability. The market cap milestones start at $2.5 billion and rise $1 billion per milestone until the market cap reaches $13.5 billion. The revenue milestones begin at $710 million of annual revenue and the profitability milestones begin at $125 million of adjusted EBITDA. Axon has exceeded the first market cap milestone, but Smith and the employees will not earn any stock until the company reaches either the first revenue milestone or the first profitability milestone.

“If we hit the milestone, then the payout is pretty predictable because we’re a publicly traded stock,” he said. “Whereas with a startup there’s all sorts of risk about a liquidity event that might not ever happen. So really it’s just the risk of can we achieve growth milestones.”

The plan has its obvious benefits from a retention standpoint: If employees want to collect all of their stock, they have to remain with the company for the plan’s duration. However, because of its high-risk, high-reward profile, Smith said he anticipates it being a tremendous recruiting tool for the types of talent Axon hopes to attract.

“Anyone who has the right experience for a senior position that we need to help us to figure out the challenge of scaling up to the next level, those people have almost universally made enough money that they don’t really need to work,” Smith said. “So, for most of them, if they’re going to work, they look at it as wanting to swing for the fences, which has traditionally meant a startup. Now they can swing for the fences at Axon.”  

Smith said even though it is in the early stages, the energy around Axon’s headquarters is palatable and that if the plan works like he envisions, it will unlock the creative energy of hundreds of people. 

“It’s certainly a game-changer and we’re pretty proud of it,” Smith said. “I’m excited because I think of this as a grand experiment. I’m not aware of another public company that’s been able to create a program that’s so powerfully aligned to transformative growth goals.”

About the Author

Brett Christie is a staff writer at WorldatWork.

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