Who Calls the Shots at EMC?

Storage networking behemoth EMC Corp. (NYSE: EMC) blames the economy and the competition for its recent gloomy prospects (see EMC Bombs Big-Time and EMC Posts Q3 Loss). But former executives say a compensation scheme involving the companys top-ranking engineers could be a key factor in declining sales.

Several former senior executives at EMC, who declined to be named for this article, have informed Byte and Switch that Moshe Yanai, VP of engineering at EMC and the inventor of its Symmetrix flagship storage array, has received a cut of Symmetrix sales for over a decade. And they maintain that the arrangement has thwarted EMC’s ability to create new hardware for a tougher market.

EMC officials refused to comment on the past or present status of any compensation arrangements for Moshe Yanai or his staff.

Yanai, a former tank division commander in the Israeli army, joined EMC in 1987, where he built the first Symmetrix. He is the author of 18 patents, all of them now part of EMC’s closely guarded intellectual property. And he remains the sole person responsible for the design and development of the Symmetrix line today.

Back in 1991, when the first Symmetrix launched, sources say Yanai cut a royalty deal with Dick Egan, the company’s founder, that granted him a percentage of the sale of Symmetrix units. At one point, they say, Yanai’s cut was one percent of all Symmetrix annual sales, paid in cash and stock.EMC officials say the company has shipped in the range of 40,000 to 50,000 Symmetrix units since 1991. Each array is typically priced from several hundred thousand dollars to over $1 million.

Sources say Yanai made sure his core engineering team were also cut in on the deal, including Natan Vishlitzky, Tuvia Leneman, Daniel Castel, and Bruno Alterescu. Three of the four engineers still work for him today. Alterescu works directly for EMC executive chairman, Michael Reuttgers.

There is no public record of any of these transactions. The SEC requires that public companies disclose the compensation of all executive officers. Yanai, despite being a VP at EMC, has apparently never been promoted to the status that would call for an SEC filing of his compensation.

EMC did well with Symmetrix for years. Officials acknowledge Symmetrix was largely responsible for EMC’s multibillion-dollar annual sales. In the 1990s, that performance helped EMC achieve the highest single-decade performance of any listed stock in the history of the New York Stock Exchange. From January 1, 1990, to December 31, 1999, EMC's stock rose 80,575 percent.

But times have changed. Hardware has become commoditized, and competitors such as Hitachi Data Systems (HDS)

and IBM Corp. (NYSE: IBM)have eaten into EMC's market share.Meanwhile, EMC has refocused its strategy on software, to make up for the weakness in its hardware sales. It claims to be spending over 75 percent of its R&D dollars on software. And just recently, EMC agreed to begin sharing its APIs (application programming interfaces) with its competitors in an effort to fuel revenues (see EMC Goes Soft and EMC, Compaq Swap APIs).

Former executives say Yanai’s royalty deal, if it still exists, is implicated in EMC’s product strategy. “The engineering team is protecting its own personal cash cow and this has thwarted innovation,” said one former senior EMC executive who now works in another industry.

Analysts have long criticized EMC for sticking with the same architecture for almost 13 years. “It’s highly unusual to have an architecture that lasts that long, EMC must have a reason to keep it going,” says Dan Tanner, analyst with the Aberdeen Group. “Those engineers' loyalties are cemented by money.”

“They are extremely good at what they do and they have their own way of doing things, but the market has changed,” says David Hill, analyst with the Aberdeen Group who was formerly in charge of market intelligence at EMC from 1992 to 1996.

Wall Street analysts say the deal sounds deeply problematic. “It’s surprising that a sophisticated company, albeit a small one when it cut this deal, would write such an open contract. Legally, what were they thinking?” says Laura Conigliaro, analyst at Goldman Sachs & Co..“Compensation of top executives is not an issue when companies are doing well, but now it is a different story,” says Chris Kwak, senior analyst with Bear Stearns & Co. Inc. “Every percentage of margin is important, which means this deal becomes a very relevant calculation.”

EMC denies rumors that Yanai is set to leave the company. Spokespeople say he laughed at the possibility.

— Jo Maitland, Senior Editor, Byte and Switch
http://www.byteandswitch.com