Getting in alignment: Why investors need to pay attention to executive compensation | Jeff Mo | EP08
Jeff Mo, portfolio manager of Mawer’s Canadian small cap strategies, discusses the importance of executive compensation to long-term investment performance.
- definitions of typical executive compensation structures
- the significance of getting incentives right and in alignment
- how playing chess can make you a better investor
- perspective on Steve Jobs’ executive pay package
A transcript of this episode is available below, modified for a more enjoyable reading experience. For more posts exploring the ideas we talk about in the episode, check out our Related Reads links.
- Guest Speakers
Start – 1:06: Jeff Mo’s history at the firm
2:04 – Overview of why it is important for investors to look at a company’s executive compensation structure
- Executive comp is the biggest level shareholders have to affect certain behaviours
3:01 – The different executive compensation components in corporate Canada defined:
- Base salary
- At-risk compensation (pay for performance); STIPs (short-term incentive plans); LTIPs (long-tern incentive plans)
4:42 – The breakdowns (cash versus non-cash)
7:07 – The overall percentage of at-risk compensation Mawer would like to see
8:17 – Criteria for executive compensation Mawer looks at when analyzing companies in the portfolio
- A wealth-creating company should generate high returns on invested capital (ROIC)
- Two components of executive compensation that directly affect ROIC:
10:56 – The proportion of the Canadian small cap universe that would make it through these two component screenings:
- Reasonableness: ~50%
- Alignment: very few
12:07 – LTIPs and trying to tackle that alignment factor
13:29 – Founders: often the best leaders
- If not led by a leader, how can a company mimic a founder-type structure: example found in Richelieu Hardware
15:52 – How Mawer evaluates long-term reward structures in terms of making an investment decision
- ROIC, ROE (performance indicators)
- Unfortunately, these are sparsely used in corporate Canada as criteria for granting some of these LPIPs (instead EBITDA and “personal score cards” are often used)
17:29 – How we can affect change
- Vote in the annual general meeting (“say on pay”)
- We often vote “no”
18:52 – Difference between being a shareholder and an option holder
- How granting options can cause capital allocation to go awry (“Hail Marys”)
20:39 – Jeff designs a “perfect” executive compensation structure (example: Constellation Software)
- Deferred compensation
- Shares bought on the open market (no dilution to shareholders)
- No options
23:15 – Jeff shares a not-so-perfect executive compensation structure
- Granting bonuses per acquisition!
25:57 – The future of executive compensation in Canada
- Positives: more “At Risk” compensation/more PSUs (Performance Share Units)
- Negative: The Ratchet-Up effect
30:44 – Rapid Fire Round
- Analogy between chess and investing
- What Jeff is reading outside of investing:
- Elon Musk biography by Ashlee Vance
- Steve Jobs biography by Walter Isaacson
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