It is a net positive that he will be retained in the business to assist growth. I can't help but view a 3% open ended bonus in this fashion as potentially having some issues and we are left without much detail...
- Firstly poor capital decisions can be made and kept out of EBITDA depending on how EBITDA is defined (e.g. asset write-offs), which doesn't seem appropriate. What if a new computer system is developed because there is the feeling that the team want to do something big and bold, but the system actually doesn't meet its cost of capital, doesn't work, etc. etc. A write off might be included in a normalised EBITDA (who knows), but normal D&A isn't and I feel that a bonus scheme should feel the costs of capital allocation decisions. EBITDA is a metric that assumes you don't need to invest in capital and that the operating cash flows can be made without it.
- does it include a normalisation for the cost of capital. Not straight debt funding costs but cost of capital - for example 15-16% on equity. If total bottom line grows at the expense of returns on equity, I'm not sure that's something that's worth paying for as a shareholder and I wouldn't want to see growth at all costs.
- what claw back provisions are in there? The lending cycle for secured automotive loans could easily be 3-5 years on average and thus if poor loan underwriting occurs that means large write-offs later I would like to know what provisions are included to capture those events, or other such items that will only appear on a longer term basis and what deferal or other claw back mechanism ensures the effects of decisions made that only show up later are factored.
- is the scheme a short-term cash or does it include deferred payment terms and tranching.
- what provisions are included regarding non-financial targets. If there are none at all, then this would be completely inappropriate in my view as it has the potential to incentivise unethical decision making. For example, there should be requirements included regarding regulatory compliance, enforceable undertakings, ombudsman type issues, etc.
- straight growth in EBITDA will potentially lead to entrenched decision making regarding dividend policy as there is less incentive to pay out a dividend when the Chairman is incentivised to retain the funds in the business. That will only have a counter-balance if the cost of equity on opening equity each year is factored into the required EBITDA normalisation each year on a compounded basis.
I could go on and on, but it is uncertain from the announcement how poorly devised or not the arrangement actually is and it's quite likely it is poorly devised from a shareholder's perspective. Depending on how it is structured will have an influence on whether I want to continue with my holding as in my experience one of the most powerful tools in creating wrong or unintended consequences is poorly designed incentive schemes for senior executives. They can be incredibly toxic. 3% of growth isn't a small amount to the individual and will create real life behaviours so if under the hood the above items aren't taken into account, then I will need to consider my shareholding. At the moment we are left guessing however on what I feel is a material item.
MNY Price at posting:
$1.94 Sentiment: Hold Disclosure: Held
