Compensation Matters

I have alluded to my distaste for excessive executive and board compensation several times since I started this blog. For example, my opinion is generally known that Geoff Cumming at Anteo Diagnostics (ASX : ADO) is considerably overpaid relative to the performance of his company, particularly revenue growth. Compensation  is also a multi-faceted beast and so just looking at the base pay of a C-suite executive is not enough. Bonus, equity participation – particularly loan-funded equity incentives – are also important factors to consider, and the total amount and structure needs to be considered. For example, given the truly underwhelming performance of Phylogica (ASX : PYC), it is hard to justify the thick-end of a million bucks of loan-funded equity participation (that’s balance sheet people!!!!) in the company given the decimated market cap and the current financing proposal on the table.

It may surprise you to know that before I even delve into the science or the commercial claims of a company, I always start with executive and board compensation structure. When I see overpaid CEOs and company with a long history of gravy-train behavior, it raises a red flag for me and frames the entire commercial performance of the company (the best example of excessive C-suite compensation leading to the spectacular demise of a company’s financial resources is Patrys, ASX : PAB). Chairs pulling in $80-100+k for marginally performing boards (you know who you are…) is a red flag. When “independent” NEDs hold shares, it is a red flag because they are no longer … er… independent.

Compensation drives all commercial behaviour, good and bad.

Similarly, when I believe that a company is trying to reform itself and rise from the grave, I also look for signs that compensation has been moderated, a sure indicator that a board has changed its way of thinking and is taking a more shareholder-centric view. For example, the former CEO of Circadian (ASX : CIR) was, by any metric, excessively paid (and also pretty much drove the company into the ground). The current CEO is paid almost $100,000 less, an important signal to shareholders that the leadership team is invested in deploying financial resources where it counts. I’m not saying, incidentally, that compensation should remain static, it should evolve as a function of success and the need for talent retention. For example, if Megan Baldwin moves Circadian from a $25m market cap company (that is widely despised) to a $100m market cap company with a bright future, she deserves to get paid commensurately for performance.

If you are the shareholder of an ASX-listed healthcare/tech company, and have a proclivity for attending AGMs, I encourage you to prepare for your AGM attendance by looking up the compensation package of the key executive/board members and benchmark them to industry averages. I have found a very nice executive remuneration report that seems to be generated annually. Read it, compare, and ask yourself whether the company’s behaviour is driven by – or reflective of – executive compensation structure.

It’s a cynical lens, but it is a critical one.

5 thoughts on “Compensation Matters

  1. Pingback: The Bioshares 2015 : “Long Tail” Awards | The Long Tail

  2. Another shining example of largesse for little in return is BLT. Witness the options issued yesterday just as the IPO EGM is coming up. It would be even more dodgy if a takeover bid were to materialize in the near future.


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