Back Getting in alignment Why investors need to pay attention to executive compensation

Getting in alignment: Why investors need to pay attention to executive compensation | Jeff Mo | EP08

June 6, 2018 Print

Jeff Mo, portfolio manager of Mawer’s Canadian small cap strategies, discusses the importance of executive compensation to long-term investment performance.

Highlights include:

  • 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:
    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:

Related Reads

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This blog and its contents are for informational purposes only. Information relating to investment approaches or individual investments should not be construed as advice or endorsement. Any views expressed in this blog were prepared based upon the information available at the time and are subject to change. All information is subject to possible correction. In no event shall Mawer Investment Management Ltd. be liable for any damages arising out of, or in any way connected with, the use or inability to use this blog appropriately.