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Archive for January, 2015

Performance Metrics and long term alignment (III)

January 24, 2015 5 comments

In this third and last post based on the IRRC Research Report, on The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design”, (1) and (2) , we will refer to the alignment between Compensation and Value Creation. See our previous posts here (3) and here (4).

The survey shows that there is a low correlation between performance and compensation, even when pay is measured as Realizable Pay, (thus including the value change in unvested equity). The authors explain that this is partly due to something slightly unavoidable: the fact that pay needs to be competitive, so that correlation with value drivers, economic returns and underlying five-year economic performance suffers.

In any case, the research (by Shareholder Value Advisors) considers 75% of change in Ceo pay is explained by certain known factors, only 12 points out of these 75% are tied to performance, (revenue size, industry and inflation account for 44 points and previous years`s compensation accounts for 19 points).

The authors then analyze the state of the art in Long-Term Compensation Design. Read more…

Performance Metrics and long term alignment (II)

January 17, 2015 5 comments

(continues from our previous post).

Using TSR to measure Long term Performance: other metrics.

 The authors identify (see graph below) a large percentage of firms in their sample that while having a positive 5-year relative TSR, achieved a negative cumulative 5-year Economic Profit (EP), and a return on invested capital lower that their respective Wacc. These firms seemed to have a value destroying business model; they also identify 17% of firms where the opposite happened. 65% of firms in the sample had aligned TSR and Economic Profit in a 5-year period. 42% of the sample consisted in firms that had cumulative negative EP in the period.

 TSR EP FOUR Q

What should managers conclude from this TSR-EP analysis? Read more…

Blockholders and Private Benefits

The idea that economic and political rights are granted in proportion to investments made by diffused shareholders constitutes a “central premise in modern financial theory”. Nevertheless, even in the Anglo-saxon countries, the fact that a single shareholder owns a relevant stake, (more than 10%, 15% or even 50%) is very common, so that there is a possibility that some private benefits could be extracted by them. Do these private benefits exist? Would stock prices reflect these benefits if they existed? Read more…