"Setting appropriate compensation falls squarely on the shoulders of outside directors, specifically those who serve on the compensation committee. Management may propose some outlandish scheme that inappropriately rewards executives far beyond reason.
Moreover, in addition to its misguided stock-based compensation based solely on stock price appreciation, its annual cash incentive program (AIP) left much to be desired. Rather than basing this payout on certain reliable, audited GAAP-based results, Valeant used two non-GAAP metricsâadjusted earnings and adjusted revenue.
The compensation plan at Valeant was irreparably flawed in two fundamental ways: (1) it was based solely on stock price appreciation and unreliable non-GAAP metrics, and (2) its excessive pay for extreme TSR growth encouraged reckless management behavior.
When evaluating outside directors, investors must always ask whose interests they are favoringâmanagementâs or investorsâ. Investors should also always question compensation plans that could easily be abused to improperly inflate executivesâ wallets." ~ An extract from the book Financial Shenanigans by Howard Schilit
Non-GAAP metrics used by Sai Life to decide the incentive plan:
- Customer Growth Potential (Qualitative, judgement based)
- ROCE (Calculation depends upon assumptions)
- Strategic KRAs (Qualitative, judgement based)
- Sustainability & ESG Roadmap (??)
- Incentives for Organizational Capability (??)
Please raise this query in the next earnings call. Whatâs the rationale for this incentive plan? I havenât had the time to look but there have been appointment and removal of Board of Directors in the Nomination & Remuneration Committee just before the compensation plan was changed.