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Management Compensation Evaluation - How Does the Change in Compensation Compare to the Performance of Your Stock's Share Price

Management Compensation Evaluation - How Does the Change in Compensation Compare to the Performance of Your Stock's Share Price

In the management compensation evaluation, I compare the change in management's compensation to the change in the company's share price, in order to evaluate if management's compensation is reasonable or not.

For the management compensation evaluation, I first calculate the change between management's compensation paid in year one and in year two. For this calculation, I use all the compensation data included in the company's proxy circular1.

Then I use the Historical Prices section on the stock's web page on Yahoo Finance to look up the historical quotes for the beginning and end of year two. (You can find the historical prices section in the top left menu after you have entered the stock's ticker in the Look Up search bar.) Finally, I compare the relative change of both in order to conclude if management's compensation is reasonable, neutral or excessive. In the table below you see the possible outcomes.

Share Price (% Change)  Management Compensation (% Change)  My Rating 
Increase Increase Reasonable
Increase Decrease Neutral
Decrease Increase Excessive
Decrease Decrease Reasonable

When management's compensation decreased in a period where it's share price increased, it depends on the reasons why management took this pay cut before I can form an opinion about the amount of compensation paid. Therefore I have a 'neutral' rating in these situations.

 

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Note: Normally, I consider a decrease in management compensation as a positive signal as the company can now instead invest this money in upgrading the value of its assets. However, when management has done an outstanding job - supported by an increase in its share price - I believe they have to be rewarded for such an achievement accordingly.

 

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1 The proxy circular is normally the primary means for a company to communicate its corporate governance practices to its  shareholders. Shareholders expect the circular to articulate, in plain language, the governance practices and activities of the board, the qualifications of directors, the issuer’s executive compensation programs (particularly as they relate to the alignment between compensation and the company’s long-term strategic objectives) and risk management strategy. Such disclosure assists shareholders in assessing the board’s performance and its ability to work with management to determine corporate strategy and oversee the management of the company’s primary risks. It also explains how the compensation structure incents management to achieve corporate objectives without exceeding the company’s appetite for risk.

About Jeroen Snoeks

Jeroen Snoeks - UndervaluedEquity.com

Jeroen Snoeks is the founder of UndervaluedEquity.com, a website for investors passionate about investing in undervalued stocks. Through UndervaluedEquity.com, he shares his experience and knowledge and will soon reveal his personal stock portfolio.


 
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