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.

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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