Welcome to the Nongaap Newsletter! I’m Mike, an ex-activist investor, who writes about tech, corporate governance, the power & friction of incentives, strategy, board dynamics, and the occasional activist fight.
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ANGI Homeservices (ticker: ANGI) was originally intended for premium subscribers, but given the recent stock run I’m sharing with everyone the “educational” parts of the write-up regarding compensation hurdles and signaling.
This is a shorter write-up, but I think it’s a pretty good companion piece to how to look at a proxy statement and developing a “big picture” view of proxy disclosures.
Note to Premium Subscribers: I know a few folks still like the set up at ANGI and I’m happy to keep working on my go-forward take if you’re interested. Let me know.
Examining Proxy Compensation Hurdles for Signal
In Part 4 of the Corporate Governance “Dark Arts” series, I suggest you pay attention to the disclosed (financial) hurdles management is compensated on:
Identify financial hurdles and compare to company guidance. Is there a material mismatch? Poor or misaligned hurdles can indicate poor governance controls.
Examining compensation hurdles (or the lack thereof) provides useful signal and read-through on both internal expectations and general Board dynamics.
“Target” financial hurdles tend to be consistent with the “base case” internal plan, and Board control and power is often expressed through compensation decisions.
That all said, you’re not always going to find signal examining compensation hurdles, but when you do it can be material.
Compensation During Times of Change and/or Volatility
Often the best times to look for compensation hurdles with material signal is during periods of major change (i.e. strategy, new CEO, post-merger, etc.) and/or volatility (i.e. COVID-19):
Volatile stock activity tends to cause changes and/or adjustments to governance and compensation. Think about how the Board would respond to a volatile stock and the potential adjustments to compensation or financial hurdles. (source)
These are the times when Boards and management teams get really focused on execution and there’s an elevated sense of urgency. It is also a time when the most important agendas are identified and prioritized. Compensation is usually readjusted to align with these priorities.
Normally, examining compensation hurdles is a backward looking exercise (i.e. look at 2020 proxy to see 2019 hurdles), but when material changes occur you’ll often get a forward looking preview of expectations through the new compensation program that’s disclosed.
Recent changes to ANGI’s 2020 compensation is an excellent example of this “forward looking preview”.
ANGI’s New Performance-Based Compensation Hurdles
On March 19, 2020 ANGI granted 1,107,828 performance-based restricted stock to CEO William Ridenour with some notable vesting terms:
Represents performance-based restricted stock units ("PSUs"), the vesting of which is subject to: (i) the Reporting Person's continuous service with ANGI through February 15, 2023 and (ii) the satisfaction of certain performance conditions related to the market price of ANGI Class A Common Stock (the "Market Price Test") and ANGI 2022 revenue and Adjusted EBITDA (the "Results Test"). From zero to 200% of the number of PSUs reported in Table II of this form can potentially vest, with the exact number of PSUs so vesting to be the greater of the number determined by applying the Market Price Test and the Results Test. In the case of the Market Price Test, 0%, 50%, 100%, 150% and 200% of the PSUs will vest if the price of ANGI Class A Common Stock is less than $6.77, $6.77, $9.00, $11.24 and $13.54, respectively (with linear interpolation applied for stock prices between the levels previously indicated).
At the time of grant, ANGI stock was trading at $5.11 per share so in order to hit 50% payout, the stock would need to appreciate ~33% to $6.77. To hit 100% payout, the stock price would need to appreciate 76%.
Robust stock price hurdles are an interesting signal to me since there’s usually an underlying financial performance expectation embedded. Boards typically don’t apply stock price vesting schedules without contemplating the underlying financial performance needed to hit each stock price tier.
If you believe the stock price vesting schedule is potentially tied to a Board endorsed operating plan, you can deduct a company’s go forward financial expectations.
We’d get even more disclosure on the PSU grant on April 29, 2020 when ANGI filed their 2020 Proxy Statement:
The vesting of the PSUs is subject to the satisfaction of certain performance conditions related to: (x) the market price of ANGI Class A common stock on February 15, 2023 (the "Market Price Test") and (y) ANGI 2022 revenue and Adjusted EBITDA for the Company's North American businesses (the "Results Test"). From zero to 200% of the number of PSUs granted can potentially vest, with the exact number of PSUs so vesting to be the greater of the number determined by applying the Market Price Test and the Results Test. In the case of the Market Price Test, 0%, 50%, 100%, 150% and 200% of the PSUs will vest if the price of ANGI Class A common stock is less than $6.77, $6.77, $9.01, $11.24 and $13.54, respectively (with linear interpolation applied for stock prices between the levels previously indicated). In the case of the Results Test, 75% to 200% of the PSUs will vest based on varying levels of revenue (from $2.1 billion to $2.6 billion) and Adjusted EBITDA for the North American businesses (from $365 million to $490 million) for the 2022 fiscal year.
A few things stood out when I saw this disclosure:
Hitting the 200% payout via Market Price Test looks very doable (it’s nearly a lock). At the time of this proxy disclosure, the stock was already trading at $6.80 (100% payout) and management would have until February 15, 2023 to hit $13.54. Given the stock is is currently $12.56, it would take a disaster to not hit 200% payout.
That said, management can hit their 200% payout sooner if they achieve $2.6 billion revenue and $490 million adjusted EBITDA for the North American business by fiscal year 2022. These financial hurdles are materially higher than 2022 consensus expectations for total company revenue ($2.04 billion) and adjusted EBITDA ($350.52 million). Even the mid-point of the financial hurdles ($2.35 billion revenue and $427.5 million adjusted EBITDA) are meaningfully higher than consensus.
If the company can hit the high end of their 2022 financial hurdles, the stock price will certainly be trading materially higher than the $13.54 price required to achieve 200% payout via Market Price Test.
It feels like the embedded financial expectations to achieve payouts via stock price are much lower than what is required to achieve payouts via 2022 financial hurdles.
While the 2022 financial hurdles seem high relative to consensus, keep in mind the hurdles were set during the heart of the COVID-19 crisis in March 2020. An argument could be made that both the stock price hurdles and the financial hurdles (despite being meaningfully higher than consensus) reflect a certain level of conservatism.
Yes, there’s a distinct possibility the 2022 financial hurdles would have been higher if not for COVID-19. Is that truly the case? I don’t know, but it certainly warrants closer examination to figure out what the Board and management believes to set such robust 2022 targets relative to consensus.