Thats a great summary @SurfinvestExecutive remuneration is a...

Thats a great summary @Surfinvest

Executive remuneration is a vexed subject and something I have thought a lot about, both on the receiving and giving (as a shareholder) ends.

The gold standard aspiration for management share ownership in my opinion is that is should be an incentive for shareholder alignment rather than a financial substitute for salary. It goes without saying that executives should be well rewarded on a cash basis. The difficulty is that shareholder alignment doesn't truly exist unless management is subject to the same risks as shareholders and that really requires them to purchase shares from their own pockets up front in my opinion. Founding members I put in a different category as they tend to be very shareholder aligned prior to IPO.

In giving performance shares as bonuses there is a psychological issue at play. It has been shown that a form of 'mental accounting' goes on with respect to how money is acquired. Numerous studies show that money 'won' has a far lower value to the acquirer than money 'earned'. Pick-a-cash-box style quizz shows give daily reminders of this dichotomy in action. How many contestants are willing to put at risk a guaranteed 'win' of $10,000 on a 1 in 3 chance to win $20,000 against losing half their 10 or more? Surprising many in fact, we've all heard the words "I came here with nothing what have I got to lose?" No one would attempt the same odds with the same amount of their hard earned salary. This is a rather long winded way of me saying that this form of "compensation" is more likely to be viewed as winnngs than earnings in my view and doesn't really create the shareholder alignment intended. But I suspect Surfinvest on the premise of your question you might agree with me.

I would prefer that management acquire their skin in the game by having the opportunity to purchase shares upfront (at a disounted price is reasonable) and be subject to the same risk profile as other ordinary shareholders. The chances of my wish coming true are zero of course.

However, I do have the opportunity to select which companies I invest in. My observation over some 40 years of investing is that the companies who's management have the following chararcteristics (with respect to share ownership) perform significantly better as a group over the long term :

• Founders on board or management
• Reluctance to issue shares as compensation
• Purchase personal shares on market
• Undertake Buy-backs
• Participate on a pro-rata basis in capital raisings
• Personally underwrite stock in capital raisings
• Preference to issue shares on a pro-rata, renounceable basis to existing shareholders

Companies like Reece, ARB and Supply networks are outperformers and comply in a large part on those points. Avita is probably at the lower end of this scale and one of the reasons I invest on a speculative basis.

On one other point thats worth relating I think is an interview I listened to with Mike Perry being interviewed by Alan Kohler very soon after the redomiciling to the US. I was surprised that Mr Perry couldn't answer the question of what was the consolidation ratio for the ASX listed Avita shares. Any shareholder was accutely aware at the time that 20 shares were consolidated into 1. This didn't strike me as someone who was very familiar with what i dont think are 'fine' details of the capital reconstruction, or someone was very shareholder aligned. You wouldn't hear that mistake from a founder but he is no doubt employed for his medical expertise so perhaps I'm being a little harsh.