"Copart’s policy requires that executives maintain equity ownership that is greater than or equal to 3x their salary. In addition to that, these options vest over 5 years (20% annually), but they cannot be exercised unless the stock trades at 25% above the strike price for 20 consecutive trading days."
This disturbs me for the following reasons:
1. Executives should absolutely have equity stakes in the businesses they run, but not through gifted shares or free stock options. True alignment with shareholders comes when executives invest their own capital, just as they do at companies like Berkshire Hathaway and Constellation Software. A free option isn’t genuine skin in the game; it’s a one-sided bet, “heads I win, tails I don’t lose.”
2. The structure seems to be all wrong. It is a structure that creates incentives to pump the share price in the short-term, even if that's to the detriment of the company and its shareholders in the long-term. All sorts of games can be played - buying back overpriced stock to inflate per-share metrics, cutting necessary operating expenses, capitalizing costs that should be expensed, or stretching depreciation schedules. None of these things is good for the company or its shareholders - so this kind of structure is all wrong. It was exactly this kind of flawed incentive structure that contributed to the downfall of IBM under Lou Gerstner - once the world's most valuable company and now a shadow of its former self - a cautionary tale of how the wrong incentives can spectacularly backfire.
Hi James, thanks for the comment and you stated some great points.
1. Copart's executive compensation is less than 50% salary, so these shares/options are not "gifts" nor are they "free." They are a substantial part of compensation and are at risk, considering they are contingent on business performance.
You're right in that buying shares with personal funds, such as at Berkshire or Constellation, is a sign of alignment, but that doesn't mean equity-compensation cannot create the same situation. Apple, Berkshire's largest holding, has stock based compensation of nearly 10% that vests at 4 years versus 5 for Copart. Surely, Apple isn't pumping the stock price in the short-term to the detriment of the company and its shareholders, considering it is one of the largest companies on Earth and has produced outstanding shareholder returns for its investors. Amazon is another example of this.
2. While this is theoretically possible, there is no evidence that Copart's management has played such "games." In fact, the business has done 3 buybacks over the past decade, all at times when the stock was undervalued. This is a speculation rather than an argument grounded on evidence specific to Copart. Long vesting periods of 5 year and hurdle rates actually reduce the incentive for short-term "games", as business performance has to be sustained to result in those share price gains.
Thanks for the comment, once again. Truly a great thought exercise for me. Have a blessed day James!
I liked IBM as a business before the Gerstner tenure
That was the nuanced point I was making
Whether or not the Copart management engage in the same underhanded tactics to pump the share price, we cannot say. But what we do know is that Gerstner was encouraged to do it by having been offered the wrong incentives.
Copart also has the wrong incentives, so the danger exists
Executive compensation should never be linked to share price. Ever.
A good CEO would object if the compensation committee proposes such a thing. At Copart that evidently didn't happen. Red flag? Maybe.
You say that there is no evidence that the share price has been pumped at Copart, but have you seen the multiple expansion? It is eye-watering. The stock is very overvalued. Why? It is growing in value faster than its unit economics are growing.
On which subject, you raise Apple. In the last few years top line revenue and bottom line earnings have pretty much flatlined, meanwhile its share price has doubled. Coincidence? Or could it have something to do with Apple using 260 billion of corporate capital to repurchase shares - not only to offset dilution from egregious levels of SBC, but also to create artificial demand in the market that pumps the price - much to the benefit of those granted SBC.
Do you think this could be a reason Buffett sold two-thirds of his Apple shares and is still reducing his holding?
"Copart’s policy requires that executives maintain equity ownership that is greater than or equal to 3x their salary. In addition to that, these options vest over 5 years (20% annually), but they cannot be exercised unless the stock trades at 25% above the strike price for 20 consecutive trading days."
This disturbs me for the following reasons:
1. Executives should absolutely have equity stakes in the businesses they run, but not through gifted shares or free stock options. True alignment with shareholders comes when executives invest their own capital, just as they do at companies like Berkshire Hathaway and Constellation Software. A free option isn’t genuine skin in the game; it’s a one-sided bet, “heads I win, tails I don’t lose.”
2. The structure seems to be all wrong. It is a structure that creates incentives to pump the share price in the short-term, even if that's to the detriment of the company and its shareholders in the long-term. All sorts of games can be played - buying back overpriced stock to inflate per-share metrics, cutting necessary operating expenses, capitalizing costs that should be expensed, or stretching depreciation schedules. None of these things is good for the company or its shareholders - so this kind of structure is all wrong. It was exactly this kind of flawed incentive structure that contributed to the downfall of IBM under Lou Gerstner - once the world's most valuable company and now a shadow of its former self - a cautionary tale of how the wrong incentives can spectacularly backfire.
Hi James, thanks for the comment and you stated some great points.
1. Copart's executive compensation is less than 50% salary, so these shares/options are not "gifts" nor are they "free." They are a substantial part of compensation and are at risk, considering they are contingent on business performance.
You're right in that buying shares with personal funds, such as at Berkshire or Constellation, is a sign of alignment, but that doesn't mean equity-compensation cannot create the same situation. Apple, Berkshire's largest holding, has stock based compensation of nearly 10% that vests at 4 years versus 5 for Copart. Surely, Apple isn't pumping the stock price in the short-term to the detriment of the company and its shareholders, considering it is one of the largest companies on Earth and has produced outstanding shareholder returns for its investors. Amazon is another example of this.
2. While this is theoretically possible, there is no evidence that Copart's management has played such "games." In fact, the business has done 3 buybacks over the past decade, all at times when the stock was undervalued. This is a speculation rather than an argument grounded on evidence specific to Copart. Long vesting periods of 5 year and hurdle rates actually reduce the incentive for short-term "games", as business performance has to be sustained to result in those share price gains.
Thanks for the comment, once again. Truly a great thought exercise for me. Have a blessed day James!
I like Copart as a business
I liked IBM as a business before the Gerstner tenure
That was the nuanced point I was making
Whether or not the Copart management engage in the same underhanded tactics to pump the share price, we cannot say. But what we do know is that Gerstner was encouraged to do it by having been offered the wrong incentives.
Copart also has the wrong incentives, so the danger exists
Executive compensation should never be linked to share price. Ever.
A good CEO would object if the compensation committee proposes such a thing. At Copart that evidently didn't happen. Red flag? Maybe.
You say that there is no evidence that the share price has been pumped at Copart, but have you seen the multiple expansion? It is eye-watering. The stock is very overvalued. Why? It is growing in value faster than its unit economics are growing.
On which subject, you raise Apple. In the last few years top line revenue and bottom line earnings have pretty much flatlined, meanwhile its share price has doubled. Coincidence? Or could it have something to do with Apple using 260 billion of corporate capital to repurchase shares - not only to offset dilution from egregious levels of SBC, but also to create artificial demand in the market that pumps the price - much to the benefit of those granted SBC.
Do you think this could be a reason Buffett sold two-thirds of his Apple shares and is still reducing his holding?
Investors need to wake up.
Smashing it out of the park with your first write up!