Thread by @alessvat

Following up from yesterday’s thread looking at management teams’ remuneration criteria, several ppl on #fintwit asked me to provide an example of a good executive compensation structure (@InvestInAssets).

A company that came to mind is Sherwin William’s – a business I am invested in and have researched recently – a thread👇:

1/14 For context, Sherwin Williams ($SHW), is the largest coatings company in the world with a market cap of $61bn. The business was founded in 1870, operates nearly 5,000 paint stores in North America and serves customers in 120 countries through its 61,000 employees

2/14 What is unique about Sherwin is its culture focused on obsessing with customer service: the CEO (and many other executives) started his career as a trainee in the Sherwin’s paint store network 37 years ago. 3/13 Sherwin had 9 CEOs in 150 years, only 3 of which were outsiders

3/14 The 2022 proxy shows Sherwin rewards its executives with an annual salary, an annual bonus (paid in cash) and a long-term incentive payment (LTIP) paid out in (a) stock options (40% of total) and (b) performance restricted share units (PRSUs, 60% of total). Let’s dig in:

4/14 The annual cash bonus for the CEO and CFO is based on targets for net sales (25% weight), adjusted EPS (40% weight) and adjusted FCF (35% weight). All good and sensible here.

5/14 The LTIP award is split into stock options (40% of total) that are awarded yearly usually in October and have a 10-year term and PRSUs (60% of total) that are awarded yearly usually in February.

6/14 PRSUs vest at the end of a 3 year period upon the achievement of pre-established financial goals, based on pre-established cumulative adjusted EPS goal (67% weight) and average annual return on net assets employed (RONAE, 33% weight).

7/14 What’s is good about this set of incentives is that (a) it is not based on TSR, but on financial metrics and (b) it incentivizes growth (via adjusted EPS) but also considers the cost of such growth (via the adjusted RONAE metric).

8/14 Furthermore, it is including a cashflow metric in the annual bonus, and it is not entirely focused on earnings (which are easier to manipulate).

9/14 In general, I prefer LTIP that do not include TSR as a criteria: my view is that executives should not aim to influence the share price; it is preferable that they focus on driving good financial performance which they can directly actually influence.

10/14 Eventually the market will do its job and reflect solid financial metrics into share price appreciation.

11/14 Ideally, I would have preferred Sherwin’s LTIP not to include stock options (with no financial criteria attached to it) but only award performance restricted share units (which require a certain financial performance to be reached).

12/14 At least, the exercise price is sensibly set (equal to the average price of the stock on the grant date) and options align executives interests with long-term shareholders.

13/14 Sherwin William’s TSR over the last 5-10-15 years was +13.5%, +15.5%, and +20%, vastly outperforming the S&P500 which compounded at +11%, +12% and +10%.

14/14 I will share more on this wonderful company in the future, but in the meantime, I hope this thread helped those that were looking for a good set of executive remuneration criteria, well aligned with minority shareholders’ interest.

Thanks for reading – please feel free to share this thread! And follow my twitter or substack investmentmarathon.substack.com for further analysis of management incentive criteria and for deep dives in companies I find attractive/interesting.