Management Compensation Comparison – Does Your Stock’s Management Rewards Itself Excessively

In this analysis of management compensation, I compare it with the compensation paid at other relevant and similar companies. To do this, I look for companies that share the following characteristics with the company I am analyzing:

  • They operate in the same industry and sector. For instance, I compare a gold-focused mining company with another gold-focused mining company, rather than a metal-focused mining company in general.
  • For the energy and mining sectors, they operate in the same project development phase: exploration, development or production. Therefore, I compare a gold-focused exploration company with another gold-focused exploration company, not with a gold-focused production company.
  • They have a comparable market capitalization. It makes no sense to compare management compensation of a $5 billion company with a $100 million company.

After compiling a list of relevant and similar companies in an Excel spreadsheet, including the company under analysis, I take the (em>total amount of management compensation and benefits paid from their latest annual reports (or management proxy circulars when available). I then divide this amount by each company’s market capitalization to obtain the Total Compensation Market Cap Ratio.

Total Compensation Market Cap Ratio

The Total Compensation Market Cap Ratio helps me determine if the management compensation of the company I am considering for my stock portfolio is reasonable compared to the companies I have identified as relevant and similar. I consider an outcome around the average as “Reasonable,” below average as “Attractive,” and above average as “Excessive.”

Expanding the Scope of the Management Compensation Comparison

If you would like to expand your management compensation comparison, you could easily add the following data in your Excel spreadsheet to do so:

Data Description
Total CEO Compensation The total amount of management compensation and benefits which have been paid in the comparison period to the company’s CEO (often a fiscal year)
Total CFO Compensation The total amount of management compensation and benefits which have been paid in the comparison period to the company’s CFO (often a fiscal year).

With this extra data you can easily adjust the Total Compensation Market Cap Ratio so that you can calculate the CEO Compensation Market Cap Ratio and the CFO Compensation Market Cap Ratio.

Note: If the outcome of the Total Compensation Market Cap Ratio suggests that management compensation is relatively high compared to the relevant and similar companies found, I first check the company’s insider stock ownership. If the company has a relatively low amount of insider stock ownership combined with high management compensation, I avoid investing in it and recommend being cautious!

If the insider stock ownership is at an acceptable level but management’s compensation is relatively high, I contact the management via email to ask why management is being rewarded so generously. I ask what management has done, compared to the companies used in the benchmark, to justify the height of the compensation paid. I inquire whether management is aware of this relatively high level of compensation and whether the company will consider adjusting the amount of compensation paid for the near future, with what amount and within which time frame.

Based on the answers I receive, I decide whether I need to act on the outcome of the ratio’s described in this analysis. As long as management can justify the reasons for the relatively high compensation, and is willing to adjust it if necessary, I proceed with my due diligence regarding that specific stock.

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