The TAMIM Australian Equity Small Cap team take a look at the power of management incentives and the importance fo management's interests being aligned with those of investors.
One of the key attributes we look for in a management team is clear evidence that they have “skin in the game”. All the evidence suggests that this is a powerful mechanism to ensure shareholders benefit from the best management have to offer. In this article we discuss the significance of management incentives and two powerful examples from the TAMIM Small Cap IMA's portfolio.
The power of “skin in the game”
The expression “skin in the game” is used a lot these days. So much so that it can be easy to forget just how powerful senior management incentives can be from a shareholders’ perspective. When we refer to senior management throughout this article, we are talking about both the top level management such as the CEO and CFO, as well as the executives and key managers who are responsible for overseeing and executing on the business’ strategy, and who often have as much influence on the success or failure of as a business as the CEO.
As a starting point, let’s delve into the reasons why management “skin in the game” is such a powerful motivator for management to succeed – some are obvious whilst others are less so:
Two Powerful Examples from the TAMIM Australian Equity Small Cap IMA Portfolio
For the above-mentioned reasons, we are impressed when we see a large number of a company’s senior management team genuinely aligned to the long term success of the company.
Two recent noteworthy examples of initiatives to align managers’ interests with shareholders in our portfolio are:
PIONEER CREDIT (ASX:PNC)
Financial services company Pioneer Credit recently changed their management incentives to focus upon performance over the next 3 to 5 year period rather than a shorter term period, with fourteen executives and senior managers being issued long term performance rights.
The following PNC management commentary summarises the benefits of this longer term way of thinking:
"Over the past 12 months, the Pioneer Board and Remuneration Committee have been working towards optimally structuring the Company’s remuneration incentives to ensure that executives and senior management are both appropriately rewarded and aligned to the Company’s strategic goal of sustainable long-term earnings growth. Due to the nature of Pioneer’s business, as an acquirer of assets that typically liquidate over a period of up to 10 years, the Board recognises the importance of appropriately incentivising employees such that they are accountable for the most significant part of tenure of acquired assets. Pioneer’s updated remuneration structure is designed to ensure that executives and senior management are focused on continuing to acquire appropriate assets at the optimal prices, rather than driving short term results.”
What this says to us:
Property fund manager Blackwall recently granted options to six senior executives and managers at a $1.00 exercise price which is at a premium to the current share price ($0.95).
We were pleased to read the following commentary from the company’s management:
“The Board of Directors is of the view that employee and executive remuneration should be linked to the success of the Company and be expressed as ownership of it. As we are ASX listed, we have the benefits of share ownership schemes to attract and retain key personnel. For junior staff this has and will be achieved through the Employee Share Bonus Scheme and for Board members and senior executives through the Employee Share Option Plan (ESOP). The aim of each program is to both reward and incentivise.”
What this says to us:
The empirical evidence is clear…:
Investing with the right management teams is a core part of our investment process, and ensuring management’s interests are aligned with shareholders is a key part of that assessment. We are always pleased to see our management teams well compensated for a job well done as it generally means our investors have done very well as shareholders, and are well placed looking forward.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.