Skate’s Art Market Research trains its eye on Sotheby’s share prices and the firms Q2 earnings. They find some worries in the firm’s compensation structure. Sotheby’s executives took a third of the firm’s net income during the first six months of 2010:

The firm achieved a 73% growth in sales and 26% growth in net income for the first six months of 2010 compared to the same period a year earlier. The share price, which fluctuated wildly throughout the spring, has climbed back above the $30 mark, gaining 6.4% on the single day of August 6, 2010 following the release of the company’s financial statement. […]

Management compensation is increasingly developing into a material issue for the firm. We estimate that the various incentives programs (including Shares Based Payments, Restricted Stock, Performance Share Units and Stock Options) and excluding certain additional cash payments linked to performance add up well to over $60mln in costs to the firm spread out over 2.5 to 5 years depending on the program and individual arrangements. Some of the effect was immediate and seen in the second quarter already: salaries and related costs grew by over 50% at Sotheby’s in Q2 2010, thereby becoming the fastest growing expense item at the firm. This cost increase was not caused by expanding headcount or salary increases (in fact salary costs were down 7% and employee benefits by 46% during Q2 compared to the period a year earlier) but instead can totally be explained by a surge in incentives-­‐based compensation that went from $2mln to $29mln in Q2 2010 (compared to Q2 2009), or from $4mln to $31mln if calculated on a six months basis. In other words, incentives-­‐based compensation paid to Sotheby’s executives in the first six months of the year exceeded over a third of Sotheby’s net income for the same period.

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