The Most Important Thing In A Proxy Statement

A proxy statement, filed with the the US Secretary and Exchange Commission (SEC) as Form DEF 14A, is a statement required of a company when soliciting shareholder votes. The proxy statement covers a wide range of topics such as executive compensation, future outlook of the company, lawsuits/litigation outcomes, company’s financial health, etc. Before touching the quarterly (10Q) or annual (10K) reports, investors first look at the proxy statement to get a quick representation of the company. In this week’s blog post, I will talk about the most important thing to look for in the proxy statement:

Executive Compensation

As a value investor, I think that it is extremely important for the management to be incentivized to take decisions that align with shareholders’ interest and long term growth of the company. Let’s look at Tesla‘s (TSLA) and Fiat Chrysler‘s (FCAU) executive compensation structures that are outlined in their respective proxy statements.

Tesla’s (TSLA) 2018 proxy statement outlines Elon Musk’s performance award proposal along with changes to the executive compensation. Throughout the proxy statement, you can clearly see that Elon Musk is heavily incentivized to grow the market capitalization of the stock. Market capitalization is equal to the current stock price multiplied by the number of outstanding shares. In other words, Elon Musk gets a fat paycheck if the stock price goes up. Although there is operational revenue milestone built in Musk’s compensation structure, it appears to be an adder to the market capitalization milestone.

TSLA Vesting Requirement

As of 11/22/2019, Tesla’s market cap is $60 billion. The table above shows the market capitalization milestones that Musk shall meet and the stock options associated with each milestone. In order to fully vest, Musk shall meet the operational milestone in addition to each market cap tranche goal. Although Elon Musk does not receive any guaranteed compensation, he does get these stock options that start vesting as he achieves set milestones.

StockOptionsMusk

As of December 31, 2017, Elon Musk owned 21.9% of Tesla’s outstanding shares. If Musk achieves all the goals set forth in this compensation package, he would then own 28.3% of the outstanding shares.

Now let’s look at Fiat Chrysler’s proxy statement and its executive compensation package. Fiat Chrysler’s CEO, Michael Manley, receives a competitive base salary of $1.6 million, target bonus of $2.4 million, and target equity fair market value of $10 million of which 75% is performance based and 25% is retention based. The performance metrics of the compensation package consists of adjusted EBIT, adjusted Net Profit, and net industrial cash. Each of these metric is has equal weight i.e. 33.33%.

bonus calculation FIA

The image above shows precisely what Manley’s target for EBIT, net profit, and industrial cash were, and how his bonus was calculated. As you can see, Fiat Chrysler places more importance to the financial health of the company rather than its stock price and market capitalization. In fact, Fiat Chrysler’s proxy statement only mentioned “market capitalization” 3 times, whereas Tesla’s proxy statement mentioned “market capitalization” 96 times.

As an investor, you have to decide which CEO is more likely to take decisions that are best for you, the shareholder. Executive compensation packages shed light on how the management is graded and compensated. As an investor, you might only want your stock price to go up, in which case Tesla’s Elon Musk is your best bet. On the other hand, you might want an executive who is more concerned about maintaining the financial health and profitability of the company, and in that case, you might want to go with Fiat Chrysler’s Michael Manley.

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Hope you learned a little and found this blog post helpful. We talked about the most important thing in the proxy statement i.e. executive compensation. We also compared the executive compensation packages for Tesla and Fiat Chrysler. As always, you can sign up for our free mailing list here.  You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!


Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions. Please review the Disclaimer and Terms and Conditions.


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