When we study a company, an important step in our research process is to evaluate the CEO as a leader and fiduciary. Is this person going to protect and grow our investment? Will this person treat us like an equal partner in his or her enterprise?
To help us answer these questions, we consider how the CEO is compensated. Ultimately, we look for a compensation package that aligns the CEO’s interests with those of long-term investors, like us. At our 2014 Client Day, Stephen Mitchell, Portfolio Manager of U.S. Large-Cap Equities and Global Equities, discussed how a major part of modern compensation packages – stock options – can cause a CEO’s interests to diverge from those of shareholders with long time horizons.
The latest issue of The View from Burgundy, entitled “Top Quartile,” builds on Stephen’s presentation. “Top Quartile” surveys the CEO compensation programs of Canada’s largest companies in an attempt to understand how the average Canadian CEO is paid, how widely Canadian companies differ in their compensation strategies and, most importantly, how compensation affects business stewardship.
To convey the survey results, “Top Quartile” uses a parable about two business executives (originally introduced in the August 1998 issue of The View entitled “Stealing a Fortune“) navigating the complexities of CEO compensation with the guidance of a clever advisor. Throughout the narrative, it addresses questions like: Why do stock options encourage managers to buy back shares and does this harm shareholders? What role do taxes play in compensation programs? How do share awards compare to stock options?
The lessons of “Top Quartile” are useful for investors aiming to understand how a CEO might affect their investment thesis, for board members contemplating how to incentivize their CEO, and for readers curious to learn how Canada’s business leaders get paid.