In management compensation evaluation, I assess whether management’s compensation is reasonable by comparing the change in their compensation to the change in the company’s share price.
To begin with, I calculate the difference in management’s compensation between year one and year two, using all the compensation data included in the company’s annual statements (or Management Proxy Circular when available).
Next, I refer to the Historical Data section on Yahoo Finance to obtain the historical stock quotes for the start and end of the second year. Then, I compare the percentage change of both values to conclude whether management’s compensation is reasonable, neutral, or excessive. The possible outcomes are shown in the table below.
|Share Price (% Change)||Management Compensation (% Change)||My Rating|
In cases where management’s compensation decreased in a period of increasing share prices, I need to consider the reasons for the pay cut before forming an opinion on the compensation amount. Therefore, I rate these situations as ‘neutral.’
Note: When management has done an outstanding job, as evidenced by an increase in the company’s share price, it’s reasonable for them to be rewarded accordingly. However, I prefer to see management pay themselves a relatively low salary and be rewarded with at-the-money stock options to align their interests with those of the common shareholders.