Netflix faces lawsuit for 'rigging' top executives' bonuses

Netflix has been accused of "rigging the compensation process" and awarding large bonuses to top executives in a manner that allegedly violated federal US tax laws.

The lawsuit was filed by the City of Birmingham Relief and Retirement System, a company shareholder, with the accusations going as far back as 2015.

According to the lawsuit, Netflix allegedly rigged its performance targets so it could deliver the bonuses and claim tax deductions on them irrespective of how the company had fared.

They were reportedly taking advantage of a legal loophole through which public companies are allowed to deduct top executives’ bonuses when they exceed $1m, but only when they require meeting the company’s performance goals and only when "the outcome is substantially uncertain".

But the thing was that Netflix had almost always managed to hit its quarterly targets for global subscriber growth with surprising - and somewhat suspicious - precision.

"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," said the lawsuit.

By implication, the current arrangement, if the lawsuit was correct, would also run afoul of the country's tax laws.

"This artificial precision resulted in the company paying these officers approximately $18.73m out of a target pool of $18.75m", it added.

The prosecution is demanding that the defendants - including CEO Reed Hastings - return all bonuses and compensation obtained as a result of the breach.

Netflix is scheduled to report its earnings for the first quarter of 2018 after the market close on 16 April.

The shares have enjoyed a strong run, clocking in with a year-to-date gain of 40% on the back of continued growth in the number of subscribers on its platform, with management forecasting global net adds of 6.35m for the first quarter of the year, up 28% from the same period in 2017.

Shares are now trading higher by 2.05% at $309.95.