You want to have managers with their skin in the game
What you want in a company, is management with their neck on the line.
It should be that if you lose money on the company – they lose too.
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And a great example of this is if you take the company Naspers.
In the company’s annual report it says, “The chief executive, Mr J P Bekker, does not earn any remuneration from the group. In particular no salary, bonus, car scheme, medical or pension contributions of any nature are payable. No other remuneration is paid to the executive directors. Remuneration is earned for services rendered in connection with the carrying on of the affairs of the business in the company.”
Basically this means the boss doesn’t take any salary – and the way for him to make money is to grow profits for shareholders. This incentive plan has seen him generate more than a 700% returns for investors in the last five years alone!
This is exactly the kind of thing you should look for, and is in stark contrast to South African Airways (SAA). Failed chief executives of SAA left the company in shambles and STILL got payouts of over R262 million.
Just look at how Naspers compares to SAA today to see how important this difference is.
So how do you find the right company?
You need to invest in the perfect balance of incentives
Generally, smaller companies have less of these problems. The resources usually aren’t there to pay ridiculous salaries the same way corporate giants do.
But then again, it can be easier for these small companies to go unnoticed and not have pressure put on the ones that do take advantage of the system.
The government doesn’t have much say on the problem, and shareholders seldom change things.
So what can you as an individual investor do to avoid these issues?
Here’s what I look for:
• The salaries of the bosses are in line with how much the average worker gets paid
• Directors who’ve managed to either turn a company around, or proven themselves by generating greater profits with long track record
• Most importantly, you want management to have a high percentage of shares in their own company
If you find this, you know management truly has their neck on their line. If the company’s share price falls, they’ll get hurt. And this is a great incentive for them to grow your wealth!
In the latest issue of the Unconventional Millionaire, I just tipped a share that has excellent growth potential. And not only that, management has a massive 18,91% ownership stake in the company – So you know they’ll put in their utmost effort to achieve this growth.
Thrive in your possibilities,