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

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
Increase Increase Reasonable
Increase Decrease Neutral
Decrease Increase Excessive
Decrease Decrease Reasonable

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.

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