Management GreedAnalyzing Firms
One of the biggest problems is with managing teams is management greed. Many managers run companies and firms in order to generate a return on investment. However, many unfortunately run firms to generate returns for themselves at the expense of investors and creditors. One of the biggest character trait flaws, management greed, can be the largest indicator for distrust. Does the management of the firm run its business to generate a return or as a personal ATM for a jet set lifestyle?
There are multiple ways that a management team can pay itself, and investors should be able to determine how they’re earning their paychecks. There are numerous ways to receive pay as an executive, and it’s potentially possible to review all of them. The various formats of pay are Typical base salary, Bonuses, Options Packages, and Stock Grants. Both the type of pay and the amount of pay can indicate whether a management team is interested more in the investment’s return, or their personal lifestyle.
A base salary usually stays the same regardless of performance. Large base salaries are a double-edged sword, management may work hard and smart in order to keep this base pay. However, a lack of repercussions means that management gets paid the same regardless of mistakes. Management that is difficult to fire, or management that holds the board of directors in the palm of its hand, can potentially have little fear of making serious mistakes. With large base salaries, they profit either way.
You should prefer bonuses to base salaries. Unlike base salary, bonuses are not guaranteed and must be earned. Pay for performance bonuses are preferable to payment which is guaranteed, even in cases of loss or failure. A large bonus encourages above and beyond performance, as long as strict performance qualifications are tied to that bonus. Beware that bonuses that are easy to attain might as well be base salaries. Previously, Managements have petitioned for performance measures to be lowered in order make their bonuses easier to obtain. If the paid bonus amount changes, the performance measure should change in direct proportions, and the relation must always be stated outright. A silent relation between bonuses and performance should be regarded as no relation at all. Lastly, you should beware of signs of dishonest management when bonuses are involved: Management will play fast and loose with rules to obtain an increased paycheck.
Exercised Stock options packages impact paying investors negatively. When a stock options package is utilized it dilutes investors’ shareholdings over time, decreasing the value of the investment and dividing per share returns. As a stockholder within a firm, almost always, options packages are not in investor’s favor. The larger amount of stock granted within the package, the worse the erosion of investor’s value, especially if large packages continue to be granted over time while invested in the firm.
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