Zynga's stock is lackluster but CEO's pay is not

Don Mattrick
Tony Avelar | Bloomberg | Getty Images

Zynga shares are down more than 21 percent over the past six months, but that didn't stop the company's board from approving CEO Don Mattrick's $57,814,391 pay package this year.

The company held its annual shareholders meeting Wednesday at its San Francisco headquarters, and a spokesperson said all motions were approved and board of directors were re-elected. She said there were several questions from shareholders but would not disclose any details.

Zynga's Mattrick is the second-highest paid CEO of all the companies in the Bay Area—after Oracle's Larry Ellison—but Zynga is far from being one of the top performing stocks in the region.

Mattrick was hired away from Microsoft to lead Zynga last July, after the company's founder Mark Pincus relinquished operational control of the social gaming company that built its brand around the FarmVille gaming franchise on Facebook. Despite an extremely volatile ride, the company's stock is essentially where it was when Mattrick took over last July 8.

Still, Mattrick has his outside supporters. UBS analysts in a report issued Tuesday said they "remain constructive over both the medium and longer term." UBS's conclusions were based on a dinner conversation at the E3 gaming conference with Zynga CFO David Lee.

He also has his critics. "We're neutral to negative on Zynga and while the CEO's pay is clearly high, our bigger concern is shareholder dilution," which is at least partially the result of several other hires in the last year, said Adam Krejcik, managing director at Eilers Research.

The stock has been pretty volatile over the last year. Last Friday, Zynga plunged 10 percent, and that followed a 50 percent selloff from its recent highs in March of close to $6 a share. Shares have tumbled nearly 44 percent in the past three months and are down more than 16 percent since the beginning of the year.

Read MoreDisappointing Zynga primes for a comeback

Mattrick acknowledged the company's difficulties at a recent Bank of America Merrill Lynch technology conference, saying "we're nowhere near where we should be."

But despite analysts' mixed perspective on Zynga's future growth prospects, few questions appear to have been raised at the shareholder meeting about Mattrick's pay package.

When the board signed off on his pay they knew it was a high risk, and potentially high, or low reward proposition, said F. Daniel Siciliano, professor and associate dean at Stanford Law School's Arthur and Toni Rembe Rock Center for Corporate Governance.

Time to believe in Zynga

Incidentally, Zynga's board is a who's who of powerbrokers in Silicon Valley: John Doerr, partner at Kleiner Perkins Caufield & Byers; William "Bing" Gordon, general partner at Kleiner Perkins Caufield & Byers; Reid Hoffman, partner at Greylock Partners and former CEO of LinkedIn; and DreamWorks Animation CEO Jeffrey Katzenberg.

"The board backed themselves into a corner by giving Don Mattrick a huge restricted stock grant, rather than options linked to performance," Siciliano said.

Siciliano went to say that the Zynga board "did whatever they had to do to get the right guy and this pay package was what was necessary to make that happen."

A review of Zynga's proxy to the Securities and Exchange Commission regarding its deal with Mattrick has four key components. First, Mattrick's "Base Salary and Bonus" will be $1,000,000 and he is "eligible for annual bonus with a target amount of 200 percent of base salary and a maximum amount of 400 percent of base salary."

Mattrick also received a "one-time sign-on bonus of $5,000,000." To woo Mattrick away from his former job at Microsoft, "he received a grant of 8,928,571 ZSU's," or restricted stock grants, which Siciliano referred to as "a make whole grant." Additionally, Mattrick was given an inducement grant "consisting of 1,785,714 ZSU's and option to purchase 7,357,143 shares" of Zynga Class A common stock.

Strong Zynga earnings

"Zynga shareholder angst is justified, but it's not fair to say that the board didn't use their best judgment. The Zynga board took a visible and high-risk strategy, and it has yet to pay off," Siciliano added.

CalPERS, the California Public Employees' Retirement, held 1,077,877 Class A shares as of June 20, 2013.

CaLPERS would not disclose to CNBC how they voted at the shareholder meeting and did not offer comment on Mattrick's pay package or the company's dual-class stock structure.

Back in April, plaintiffs filed a revised shareholder lawsuit against Zynga. The suit accuses current and former executives of a pump-and-dump scheme in a $593 million secondary sales following the company's initial public offering. The original case was dismissed by U.S. District Judge Jeffrey White in San Francisco. Zynga declined to comment on the case.

Zynga's market cap currently stands at $2.8 billion, but the company has reported falling revenue for several quarters. Right before last year's shareholder meeting, Zynga laid off close to 18 percent of its staff—520 people—saving the company about $70 million per year.

Read MoreBest-selling games of far

Krejcik said "Zynga is behind the curve on mobile, and they've got a long way to go before they catch up to King Digital, Supercell or even Electronic Arts mobile efforts."The company is betting big on the FarmVille 2 mobile game, but it "hasn't been a home run," he said.

"While a lot of hedge funds own the stock, Zynga needs to move the needle on top line," Krejcik said.

"The key will be watching the Zynga stock price and performance, in the marketplace over the next six to 12 months, and the board's behavior. The strength or weakness could dictate what the next round of compensation for Mattrick looks like going forward," Siciliano said.