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I used to work as an equity analyst, so have come at this problem from totally the other end. The number one problem, that I have seen no-one talk about, are c

I used to work as an equity analyst, so have come at this problem from totally the other end. The number one problem, that I have seen no-one talk about, are certain incentives from the market (not short-termism, if someone says that they don't understand what is happening). I buy PEP at 15x earnings...I don't need a lot of growth to make that price work. Even if they grow a 10-20% over five years, I will probably make a market return. Which is fair. If I buy PEP at 25x earnings plus (roughly where it is today)...that is different. I need earnings to double and then some within five years. Huge imperative for growth. If I don't see the growth, I will lose 50%+ on the position. So when the share price is that high, the incentives are out the window. The board is never going to hire the guy who says: well, share price could do with a reset, how about we take a year boys...no, at 25x earnings, they will take the guy who comes into the room ten minutes after his piece, rips his shirt off in the interview, and drinks blood for breakfast. The boys on the comp committee want growth, they will set the 20x salary bonus package accordingly, and the exec team is going to fight like rats in a bag to get the juice. This got very bad in FMCG too because 3G Capital exposed the amount of middle management waste at Heinz and, of course, consumers are consuming less of these unhealthy snacks. No top-line growth, so costs is the only way you can pay out. On the OP, it is deplorable. Investors do not want this. Most fund managers do not have money in their own funds, the PR is horrendous. Companies shouldn't treat their workers this way. But...the Fed has pumped up the market, every exec team is feeling joocy on that stimmy, multiples are through the roof...everyone knows it is going to blow but the music is still playing. I have no idea what the solution is, only that lots of people get the incentives totally wrong. Investors aren't short-term. Every investor wants the stock they can hold for five, ten, twenty years. But I have seen good companies run themselves into the ground because the comp committee wanted a "stretch" target that was literally impossible (particularly in retail, any company that can grow unprofitably but cheaply will be hung by the comp committee). Companies are even doing % of market cap growth by date X packages now, it is truly obscene (thank Elon). CEOs create these cultish atmospheres because of the incentives of pay (this is true of PEP: afaik, Nooyi was a terrible CEO, made terrible acquisitions to goose the share price, never got challenged, and walks away with $25-50m...if you lose the guys on the floor, you don't have a company tomorrow...if you don't hire Nooyi, you have saved billions in shareholder value...but it is the latter that is indispensable?).

gwright 5y ago
I feel like there is something interesting in here but the finance jargon and writing style is obscuring it for me.
- mjevans 5y ago
  It was unclear for me too. Though the gist of what I understood around the jargon: Overvalued companies are driven by the stock market to have unsustainable growth, always more than before or at the very least always going up over time, even with complete market dominance. Therefore once a company caps out a market only cutting quality or civic duty corners are left and it becomes a knife-fight to the death for all involved; with more literal impacts to the workers and customers (quality of output). Even if a company COULD just allow the profit to stabilize at a long term sustainable level that would benefit everyone most overall; they won't and will instead be driven for short term results.
  - hogFeast 5y ago
    Yes. Almost. But the point is explicitly not that the issue is short-termism. I am not going to go over everything again, but the issue is not solved (as everyone today thinks) by bailing people in. Look at Tesla's exec package: Elon's package is what...$100bn? He will lose money if the stock goes to zero, but that is still a very one-sided risk for him. So doing long-term packages makes no difference because the reward is all one-sided, no risk, and the fundamentals usually aren't changed. It actually makes it worse because you dangle $100m in front of someone on a base package of $500k salary...they will believe anything to get that money. So timescale isn't relevant (again, the market isn't short-term...every investor wants a "one decision stock"...you buy, hold for the rest of your life). As an example, this is why you see so much M&A...it makes no sense but you buy revenues from another company, you get growth. Execs don't care about the price, you just need growth, you just need to hit your targets. Whether they are short or long, the issue is with the incentives and target (although are wrong for a few different reasons I have already mentioned, and I haven't yet seen a company that has managed to structure pay perfectly...most just wildly overpay for very mediocre execs who add nothing).
  - 5y ago

gwright 5y ago

I feel like there is something interesting in here but the finance jargon and writing style is obscuring it for me.

mjevans 5y ago
It was unclear for me too. Though the gist of what I understood around the jargon: Overvalued companies are driven by the stock market to have unsustainable growth, always more than before or at the very least always going up over time, even with complete market dominance. Therefore once a company caps out a market only cutting quality or civic duty corners are left and it becomes a knife-fight to the death for all involved; with more literal impacts to the workers and customers (quality of output). Even if a company COULD just allow the profit to stabilize at a long term sustainable level that would benefit everyone most overall; they won't and will instead be driven for short term results.
- hogFeast 5y ago
  Yes. Almost. But the point is explicitly not that the issue is short-termism. I am not going to go over everything again, but the issue is not solved (as everyone today thinks) by bailing people in. Look at Tesla's exec package: Elon's package is what...$100bn? He will lose money if the stock goes to zero, but that is still a very one-sided risk for him. So doing long-term packages makes no difference because the reward is all one-sided, no risk, and the fundamentals usually aren't changed. It actually makes it worse because you dangle $100m in front of someone on a base package of $500k salary...they will believe anything to get that money. So timescale isn't relevant (again, the market isn't short-term...every investor wants a "one decision stock"...you buy, hold for the rest of your life). As an example, this is why you see so much M&A...it makes no sense but you buy revenues from another company, you get growth. Execs don't care about the price, you just need growth, you just need to hit your targets. Whether they are short or long, the issue is with the incentives and target (although are wrong for a few different reasons I have already mentioned, and I haven't yet seen a company that has managed to structure pay perfectly...most just wildly overpay for very mediocre execs who add nothing).
- 5y ago