LTIP AWARDS - Stockopedia comments on IQE22 Feb 2020 13:22
Today we get some information about the latest LTIP plan for IQE's CEO and CFO. They are getting 2.7 million nil-cost options, subject to EPS and TSR (total shareholder return) criteria.
I approved of the recent letter written by Mark Slater to the Remuneration Committee of each of his company's holdings.
In it, he made a couple of points where I also bang the drum:
nil-cost options are not the right way to align interests
similarly, there are problems with using "adjusted EPS" as the measurement of success.
IQE continues to use the framework of nil-cost options and EPS as the primary metric for the vesting of options, as do many other companies.
Its shareholders tried to rebel against IQE's remuneration schemes at the recent AGM, after an advisory body warned that total dilution over a 10-year period was beyond acceptable limits (15%), and that conditions relating to early leavers were too generous.
IQE responded by saying that it would, over time, try to reduce dilution from options to below 10%, although it wasn't "feasible" to do it immediately, based on options already granted.
The right way to do things
I've said this before, but I favour bonus schemes which are paid in cash, not in equity options. I want companies to treat their equity as if it's something rare and valuable, like gold-dust, not to be diluted.
Handing out millions of options betrays a mindset that the equity is just paper and that there's an endless supply of it . Why would I want to own something which is in infinite supply? The IQE share count has been rising steadily for years.
If options do have to be used, then options at the current share price (instead of nil-cost options) would at least help to align management with shareholders - since managers will only benefit from their options if shareholders enjoy a capital gain.
Performance Criteria - I also prefer bonus schemes which are triggered by ROCE and operational key performance indicators, instead of EPS or share price movements.
ROCE takes into account the amount of funding (both debt and equity) used by the company, and operational KPIs can be finely tuned to the company's goals. EPS is not the worst metric by any means (EBITDA gets that prize), but I still think it's far from the best.
IQE - a worrying track record
I'll need to see the latest annual report (2019) for an updated picture at IQE. For 2018, remuneration at the company definitely looked to be on the high side (bear in mind that operating profit that year was £8.7 million):
CEO was paid £3.7 million (of which £3 million was from the 2016 LTIP)
COO was paid £2.5 million (of which £2 million was from the 2016 LTIP)
In addition to the LTIP, bonuses worth 20% of salary were paid to the CEO and COO, despite the fact that they hadn't hit their financial targets:
Financial objectives (EBITDA and cashflow measures) were not met in 2018, however the Commit
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