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

 



Your host

cam porthole3 Cameron Webster, CFA, MBA
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:

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Comments

  • Sean McHugh 14/06/2018 12:55pm (2 months ago)

    reasonable balanced discussion which i learned some thing which a I had a basic understand but holding 25k shares of some stocks I wondering if I should be tsing s more active role of awarding my proxie votes

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