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Netflix Accused of Rigging Executive Bonuses

A Netflix shareholder has filed a federal lawsuit accusing the streaming giant of awarding lavish bonuses to top executives.

The suit, brought by the City of Birmingham Relief and Retirement System, alleges that Netflix violated tax law by giving “multi-million dollar windfalls” to executives including Ted Sarandos based on performance targets the company knew it was almost certain to achieve.

“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 suit alleges.

Public companies are allowed to deduct salaries for top executives up to $1 million. Above that threshold, compensation may only be deducted if it is based on performance goals. The law requires that the goals be “substantially uncertain” at the time they are set. The Netflix bonuses were based on streaming revenues, which the pension fund alleges were highly predictable once the company knew how many subscribers it had in a given quarter.

The pension fund alleges that four Netflix executives reaped millions of dollars from the improper bonuses. Ted Sarandos, the chief content officer, is accused of taking $10.5 million. Neil Hunt, the former chief product officer, is alleged to have gotten $12.6 million. Greg Peters, the current chief product officer, is accused of taking $3.2 million. David Hyman, the general counsel, is alleged to have received $800,000.

The lawsuit echoes a 2017 article in the Financial Times, which noted the “uncanny accuracy” of Netflix’s projected bonus payments. The article noted that the company established a bonus pool of $18.75 million for three of its executives in 2016. According to regulatory filings, those executives ended up receiving $18.7295 million in bonuses for that year.

In response to the Financial Times, Netflix said its executive compensation practices are consistent with federal statutes.

“The fact the targets are set during guidance makes them inherently uncertain, and not a foregone conclusion,” the company told the FT. “To hit the target, it requires effort and management skill by the executives. It is also a benefit to the company as we receive a tax deduction.”

The shareholder suit was first reported by the Hollywood Reporter. Netflix declined to comment, saying the company would weigh in “at the appropriate time.”

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