Let’s be honest: we live in a world that glorifies people with fame, fortune, and / or power. As a result, most people (both employees of the company and non-employees) tend to put executives up on a pedestal, rightfully or not.
In the Philippines, listed companies disclose the compensation of their top executives under “Part III: Control and Compensation” of the SEC Form 17-A (i.e. the “annual report”). Most companies disclose “total salaries” and “total bonus” for two categories of executives:
- CEO and Four (4) most highly compensated executive officers (i.e. the “top five”)
- All officers and directors as a group unnamed (this could be any number of people)
The names of the five (5) highest compensated directors and/or executive officers of the Company would typically also be disclosed.
It’s worth spending a little time and effort to analyze the compensation of top executives and to relate this to the productivity of these employees. To the newbie investor, yes, executives are also employees of the company: the President, Vice-Presidents, CEO, CFO, etc. are all employees of the company. From a certain perspective, it’s a bit strange that a two-tier structure exists to delineate “regular employees” (i.e. rank-and-file or non-management) from “special employees” (i.e. management, senior management, executives, etc.). At the end of the day, each one of them is an employee of the company. Each one receives monetary (and sometimes non-monetary) compensation. As such, doesn’t it make sense to measure the productivity of each person vis-à-vis the compensation received?
The section called “Executive Value Creation (ExVC)” compares executive pay against several financial metrics in order to assess the productivity of executives. Digging through executive compensation gives us a glimpse, albeit a very small one, into the possible motivations of executives for the decisions that they make in running the company. This is important because executives are paid a lot of money and make decisions that affect the business. Corporate finance literature is filled with empirical research that talk about how short-term performance metrics lead corporate executives to make decisions that boost short-term operating results even if long-term operating results might be jeopardized.
For the ExVC framework, executive compensation is compared against the following metrics in order to assess executive productivity:
- Sales
- EBIT (Operating Income)
- Net Income
- Operating Cash Flows (OCF)
- Economic Profit (EP)
- Invested Capital
- Cash Dividend
Wouldn’t you be interested to know whether management was productive or not? Can you sleep well without knowing the productivity level of management of the company you invested in?
