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Your host

Cameron Webster, CFA
Institutional Portfolio Manager

Cam likes to think and act long-term. He has broad experience in the capital markets over his 20+ years as an analyst, portfolio manager, and client service professional. When not thinking about markets and investing, Cam trains and participates in other “boring” and disciplined activities such as ultra-endurance races—marathon, triathlon, one-day 300+km bike rides.

Shownotes

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:

1. Reasonableness
2. Alignment

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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Related Reads

• Why executive compensation matters to investors
• Executive compensation is out of control. What now?

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