Before making any investment we make sure we understand how management incentives are set and we engage with the company, prior to buying the stock, if anything is unclear.
Once an investment is made, we monitor proxy statements to identify whether remuneration policies are subject to change.
During due diligence on a potential addition to the internal portfolio (US:Educational Services) we discussed variable compensation with management to gain a better understanding of cash bonuses, which were based on the achievement of pre-established corporate performance goals and on a qualitative assessment of each individual’s performance. It is difficult for investors to determine if qualitative goals are being achieved and what value they create for shareholders. We expressed our concerns accordingly.
Corporate performance goals based on adjusted EBITDA and adjusted EPS made no reference to capital efficiency. We saw ROCE as an appropriate metric for the company given its acquisitive nature.
The company welcomed our thoughts on compensation and was receptive to considering ways to improve its remuneration structure.
Our decision was to invest, and we have added the company to our Incubator strategy.