Do you think the crazy compensation for Howley and co. truly makes them aligned with investors? As I heard someone else put it, it feels like a "heads, I win big, tails, I still win" type of thing. They get over 2 million shares p/year regardless of performance and then something like 18% of share price increase each year computed using the original share count of ~150 million shares (and this bonus will be in effect every year for basically ten years) -- and it's not subject to a high water mark, to put it in hedge fund terms. It seems like an insane amount of compensation for people who aren't even full time managing the business (they're on the board). Last year their comp. was easily over 100 million. They could be completely awol and still do quite well for themselves. Anyway, I know none of that has to do directly with the business operations but it's still something that keeps me up at night a little with this one which I've owned since it was the EverArc "spac".
Larry - great question and I generally agree with your sentiment. I'm not crazy about the "founders shares" comp arrangement as it will certainly be fairly dilutive to common shareholders. That said, if there is any group that deserves some leeway and benefit of the doubt, I would put Howley and Thorndike in that camp. Given their track record I don't believe their intention is to enrich themselves at the expense of shareholders and I'd lean towards returns, net of their comp, will be attractive. In my view it's likely the value add from the directors capital allocation and M&A experience is actually incremental to the business returns.
I could certainly be wrong on this, and normally I would not consider a business that has an arrangement like this with the board, but I'd consider Howley to be an exception. It's another reason I'd prefer a larger margin of safety before buying the stock as the enhanced forward returns from a lower purchase price offsets some of the dilution headwinds from the EverArc arrangement.
Great question Larry and well responded Dan. I find the compensation to be egregious to say the least (coming from the biotech investing world that is saying something!)
A large MoS is definitely the way forward ont his one. As others over at VIC and elsehere have said, you're probably looking for a buy in at sub $8.
I agree! The amendment to the management performance hurdles (in conjunction with the already very rich comp package for the SPAC owners) recently was a bit of a deal killer for me. Can't stand when company's do that.
Seeking clarification on a prior comment here - the way I read the agreement is that there is in effect a high water mark ("over the highest"). Am I reading this wrong? (Not that they are clearly taking more than a pound of flesh here ...)
"Thereafter, the Variable Annual Advisory Amount will only become payable if the Payment Price during any subsequent Payment Year is greater than the highest Payment Price in any preceding Payment Year in which an amount was paid in respect of this Agreement. Such Variable Annual Advisory Amount will be equal in value to eighteen percent (18%) of the increase in the Payment Price over the highest Payment Price in any preceding Payment Year multiplied by the Founder Advisory Agreement Calculation Number."
You are interpreting this correctly, yes. They receive a fixed 1.5% annual fee as well as 18% of the increase (if any) in average share price over the last 10 trading days of the year which is subject to a high water mark. It's basically a hedge fund fee structure.
Hi Dan, please correct me if I am getting this wrong. Let's say in 2022, last 10 trading day average is 9 usd which means the variable won't be paid out. In 2023, if the stock closes at 15 usd (10 day average), does the mark based on the 9 usd of 2022 or of a previous year that the variable was paid out? Thanks for the clarification.
The basis for the calculation in order to earn the variable amount is the highest 10 trading day average from any previous year. In 2021 the stock traded between $13-$14 at the end of the year so in order to earn the variable amount next year the stock would have to trade above that level (not $9 as in your example). It's very similar to a high water mark for hedge funds and that to earn incentive fees the returns need to exceed the previous high point, regardless of year. Hopefully that helps.
Do you think the crazy compensation for Howley and co. truly makes them aligned with investors? As I heard someone else put it, it feels like a "heads, I win big, tails, I still win" type of thing. They get over 2 million shares p/year regardless of performance and then something like 18% of share price increase each year computed using the original share count of ~150 million shares (and this bonus will be in effect every year for basically ten years) -- and it's not subject to a high water mark, to put it in hedge fund terms. It seems like an insane amount of compensation for people who aren't even full time managing the business (they're on the board). Last year their comp. was easily over 100 million. They could be completely awol and still do quite well for themselves. Anyway, I know none of that has to do directly with the business operations but it's still something that keeps me up at night a little with this one which I've owned since it was the EverArc "spac".
Larry - great question and I generally agree with your sentiment. I'm not crazy about the "founders shares" comp arrangement as it will certainly be fairly dilutive to common shareholders. That said, if there is any group that deserves some leeway and benefit of the doubt, I would put Howley and Thorndike in that camp. Given their track record I don't believe their intention is to enrich themselves at the expense of shareholders and I'd lean towards returns, net of their comp, will be attractive. In my view it's likely the value add from the directors capital allocation and M&A experience is actually incremental to the business returns.
I could certainly be wrong on this, and normally I would not consider a business that has an arrangement like this with the board, but I'd consider Howley to be an exception. It's another reason I'd prefer a larger margin of safety before buying the stock as the enhanced forward returns from a lower purchase price offsets some of the dilution headwinds from the EverArc arrangement.
Great question Larry and well responded Dan. I find the compensation to be egregious to say the least (coming from the biotech investing world that is saying something!)
A large MoS is definitely the way forward ont his one. As others over at VIC and elsehere have said, you're probably looking for a buy in at sub $8.
Here we are at the end of June and its $5.79...and yet I still can't pull the trigger on this one!
I agree! The amendment to the management performance hurdles (in conjunction with the already very rich comp package for the SPAC owners) recently was a bit of a deal killer for me. Can't stand when company's do that.
Seeking clarification on a prior comment here - the way I read the agreement is that there is in effect a high water mark ("over the highest"). Am I reading this wrong? (Not that they are clearly taking more than a pound of flesh here ...)
"Thereafter, the Variable Annual Advisory Amount will only become payable if the Payment Price during any subsequent Payment Year is greater than the highest Payment Price in any preceding Payment Year in which an amount was paid in respect of this Agreement. Such Variable Annual Advisory Amount will be equal in value to eighteen percent (18%) of the increase in the Payment Price over the highest Payment Price in any preceding Payment Year multiplied by the Founder Advisory Agreement Calculation Number."
You are interpreting this correctly, yes. They receive a fixed 1.5% annual fee as well as 18% of the increase (if any) in average share price over the last 10 trading days of the year which is subject to a high water mark. It's basically a hedge fund fee structure.
Hi Dan, please correct me if I am getting this wrong. Let's say in 2022, last 10 trading day average is 9 usd which means the variable won't be paid out. In 2023, if the stock closes at 15 usd (10 day average), does the mark based on the 9 usd of 2022 or of a previous year that the variable was paid out? Thanks for the clarification.
The basis for the calculation in order to earn the variable amount is the highest 10 trading day average from any previous year. In 2021 the stock traded between $13-$14 at the end of the year so in order to earn the variable amount next year the stock would have to trade above that level (not $9 as in your example). It's very similar to a high water mark for hedge funds and that to earn incentive fees the returns need to exceed the previous high point, regardless of year. Hopefully that helps.