Shareholder returns can be related to executive compensation in California.   At face value, shareholders’ rights and their return on investment may appear to be in jeopardy whenever CEOs and other managers are paid amounts that do not seem to correspond to their value.  This may, in fact, be true if an executive’s compensation package pays them in stock and cash, without regard to changes in the marketplace.

In such a case, the company and ultimately the shareholders will be placed in jeopardy if the managers of the company have no incentive to avoid risky decisions, or to consider the long-term health and prosperity of the company.

In order to protect shareholder rights then, it is a good practice, and may even be considered necessary, to ensure that a company’s managers have the correct motivation to increase the value of the company to its shareholders.

While Shareholder returns can be related to executive compensation in California there are several specific ways that shareholders can be protected in this manner.  For one, if an executive is to be paid partly in stock, then limitations should be placed on when the executive may sell the stock.  Ideally, vesting the stock only after the executive has left the company can place the manager in the shoes of a shareholder, thereby encouraging the executive to focus on long-term growth.

Another way to protect shareholders’ returns is to keep the pay package flexible.  This means allowing for changes in the market and within the company to be reflected in an executive’s pay.  For example, if the company’s stock price were to fall dramatically, it would be a good idea for the managers to receive more stock and less cash.  This would then motivate managers to make decisions to increase the share price.

Finally, executives should have some form of debt compensation.  Research shows that CEOs with large debt compensation features manage their companies more conservatively, ending up with fewer loan covenants and a lower cost of debt.

Careful and creative executive compensation packages can go a long way toward avoiding shareholder disputes against California businesses for complaints such as breach of fiduciary duty and breach of the covenant of good faith and fair dealing.

Pro-Tip: “Shareholders just want to be treated just like other shareholders. And so when you don’t have these safeguards in place, it’s very tempting for management to say, well, technically I’m going to pay me, myself more. Technically, I need a new car. And technically, the company should lease me a house to stay in. And technically this, when, if you would had a request that certain things be in place before you invest a substantial amount of money, they may have agreed to ensure executive compensation won’t exceed so much of the EBITDA (earnings before interest, taxes, depreciation and amortization), simple things like that could be requested. If they say, no, you keep your money.

If let’s say you don’t have a shareholder agreement, or you have a weak shareholder agreement and management has broad discretion to do a lot of things, and they’re getting ready to do some questionable things, to make a big profit. And you come along and say, wait a minute, I think something’s wrong here. And you pose an objection. Well, before you file a lawsuit, this opportunity that management has is still there. So if you are the squeaky wheel right away, before they go forward with whatever they’re doing, then you may profit from that. But if you’re not, then it’ll just happen. And instead of sharing in the profits, you’ll be fighting to claim you had rights to get some money back.

It’s all about the shareholders’ agreement and the controls within corporate documents to balance executive compensation with performance.” – Dan Watkins, Founding Partner

It is usually in your interest as an investor to know Shareholder returns can be related to executive compensation in California. We invite you to review our podcast Episode 14 – Shareholders’ Rights as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.  We can help you to protect and assert your rights as a shareholder or investor.