A Guide To MicroCap Executive Compensation
Ian Cassel, a full-time microcap investor and founder of MicroCapClub and the MicroCap Leadership Summit, shared his “Thoughts On MicroCap Executive Compensation“ in a 2013 blog post that serves as a good guide to microcap executive compensation to this day.
Microcap executive compensation is usually made up of some combination of cash and stock. Let’s take a look at microcap investor guru Ian Cassel’s opinions on each form of compensation.
Cash, usually the most common form of compensation for employees is much less common for microcap executives (especially executives of unprofitable microcaps).
According to Cassel “management teams that draw large cash salaries above and beyond the norm aren’t aligned with shareholder interests. Smart investors know this too, and they will completely pass on buying a stock if the salaries are too high.”
Cassel offers the following guide to peak acceptable executive salaries based on a microcap’s financial performance.
MAX Cash Compensation For MicroCap Executives
Based on Financial Performance:
Tier 1: Company is unprofitable – $1 million EBITDA per year: $200,000 max
Tier 2: Company produces $1 million -$5 million EBITDA per year: $250,000 max
Tier 3: Company produced $5-10 million EBITDA per year: $300,000 max
While Cassel points out that there are exceptions to the table above, compensation above these levels are a huge red flag.
About 90% of microcaps are unprofitable so, naturally, cash isn’t an easy form of compensation for most microcap executives. In many situations, there are simply too many cash needs that are more important than compensating the management team.
To overcome a cash shortfall, microcap companies usually use restricted stock grants and options.
Cassel says that companies need to be careful not to be overly dilutive with stock compensation becuase, from an investor’s perspective, it can be just as bad (or worse) as high cash compensation. To illustrate that point, Cassel uses the following example; “If a company has a $10 million market cap and total salaries are $2 million per year, and half of that compensation is issued in stock options, it illustrates my point.“
Cassel suggests that “Stock options should be granted in reasonable amounts and should be based on performance metrics that enable stock appreciation.”
He provides the following guidelines for determining microcap executive equity compensation.
Business Milestones: “Predetermined events the board and management feel are important for the year ahead. Ex: Product XYZ rolled out by August, Two licensing deals accomplished by year-end, etc.”
Financial Milestones: “Auxilio (AUXO) is a good example of a management team incentivized by financial milestones. In their case they receive option bonuses if the company achieves $2 million in EBITDA in 2013, $6.3 million in 2014, and $9.2 million in 2015.”
Stock Milestones: “This one might be a bit controversial, but I believe it is a public company management team’s fiduciary duty to “be public” and let investors know they exist. I would love to see bonus awards granted for stock price and volume milestones. I certainly don’t want management teams doing unscrupulous things, but I believe it does make sense to tie some level of management compensation directly to stock performance. The goal would be to encourage microcap CEO’s in particular to get out and tell their stories.”
Read Ian Cassel’s thoughts on MicroCap Executive Compensation in the MicroCapClubs’ blog HERE.
Learn more about Ian Cassel and the MicroCapClub HERE.