Friday, December 4, 2009

Determining CEO Compensation

We've discussed here how misalignments can occur between CEO and shareholder interests. In fact, as we saw here, this misalignment may have contributed to the fiasco formerly known as Lehman Brothers. Before investing in a company, it's a shareholder's responsibility to ensure management's pay structure makes sense. For example, if stock options make up a huge part of a CEO's pay, be aware that management has incentives to take big risks to generate big paydays.

Disclosure of the salary, bonuses and compensation structure of the five top executives are an SEC requirement for all public companies in each company's annual proxy statement. As an investor, you can find this info for any US stock you own as follows:

1) Go to the EDGAR Company Search page
2) Enter the ticker symbol of your company and hit 'Find Companies'
3) Search for the latest filing called "DEF 14A"(this is the annual proxy statement)
4) Open that file, for all sorts of goodies about executive compensation

In there, you'll also find a discussion about how the pay/bonus and compensation structure was determined, including some company peer groups that were used as comparisons by the Compensation Committee.

Happy hunting!


Anonymous said...

I've never commented on here before, but I wanted to say thank you for all of the informative posts. I've learned a great deal about value investing and what to look for, from reading your posts. Have a great weekend!

Saj Karsan said...

Thanks, Anon, I appreciate it!

AKWON said...

Hey Saj could you just take a quick glance at AAONS Def 14A and give me your opinion whether their compensation is excessive or not for a company with about 300 mil market cap, and 20 mil yearly net profit. I do not have a clear idea of what is excessive and what is reasonable yet. Thanks


Saj Karsan said...

Hi akwon,

Doesn't seem too out of line to me.

AKWON said...

Thanks Saj. That company has continued to return high ROE, however, as their price to book ratio increases their assets does not. So I assumed rather than increasing the value of their company, they were too busy buying back stocks to sweeten managements compensations.