Need help on Biglari's compensation plan

[Kuhndan]

So I understand he gets 25 percent of earnings over 6 percent of book value and that there is a high water mark. Here's my question, say this year the growth in book value is 0 percent. The following year he earns 8 percent. Does he get a bonus in the second year? Or since he didn't grow book value in year one, does that mean he needs to grow book value 12 percent in the second year to qualify for a bonus? My guess this is standard hedge fund incentive structure but Im not familiar with it. Thanks in advance!

[Parsad]

So I understand he gets 25 percent of earnings over 6 percent of book value and that there is a high water mark. Here's my question, say this year the growth in book value is 0 percent. The following year he earns 8 percent. Does he get a bonus in the second year? Or since he didn't grow book value in year one, does that mean he needs to grow book value 12 percent in the second year to qualify for a bonus? My guess this is standard hedge fund incentive structure but Im not familiar with it. Thanks in advance!

 

I have not taken a good look at the compensation plan since he implemented it, but that is what I understand.  If you exclude the mark to market accounting of BH's investments, there is really no way he can't make at least 9% annually ROE.  Shareholder equity is about $300M and net income should be around $28-30M...90% coming from Steak'n Shake's consistent earnings...and net income should grow annually at 2-3% just from Steak'n Shake.  So if he did nothing with the cash, he would still be making better than 6% annually ROE.  Cheers! 

[robface]

wow...if that is right, is there anyone who thinks that the compensation is pretty excessive?  seems very aggressive to me and that you could make his interests align with company performance without the excess.  is it greed or talent investors are paying for to approve this plan (or something else)?

[bookie71]

Check out his first quarter earnings

http://www.bizjournals.com/sanantonio/news/2012/05/18/biglaris-second-quarter-earnings-down.html?ana=yfcpc

[rranjan]

wow...if that is right, is there anyone who thinks that the compensation is pretty excessive?  seems very aggressive to me and that you could make his interests align with company performance without the excess. is it greed or talent investors are paying for to approve this plan (or something else)?

 

He kept shifting the goalpost and fooled most people to get what he wanted.

[Kuhndan]

After a little more research, I don't think the 6% bogey is cumulative....(here is an excerpt from the SEC filing for the plan)...

 

<<High Water Mark . Under the Incentive Agreement, Mr. Biglari will not receive incentive compensation under the Incentive Agreement unless the Corporation’s book value exceeds the previous highest level in book value, or the “high water mark,” plus a 6% growth in book value, i.e., the hurdle rate (which has been corrected in the Incentive Agreement attached as Annex A to this proxy statement to clarify that the hurdle rate is not cumulative. As such, in a fiscal year in which book value declines, the marker for subsequent fiscal years will require the complete recovery of the deficit from the last high water mark plus attaining the stated 6% hurdle rate before Mr. Biglari is eligible for a bonus.>>

 

With the key comment above being, "to clarify that the hurdle rate is not cumulative", which I would interpret, the company could post 0% growth in book value for two years at show an 8% growth in year three and he would get 25% of the 2% excess even though he underperformed in years 2 and 3. What a deal.

[BRK IN MKE]

After a little more research, I don't think the 6% bogey is cumulative....(here is an excerpt from the SEC filing for the plan)...

 

<<High Water Mark . Under the Incentive Agreement, Mr. Biglari will not receive incentive compensation under the Incentive Agreement unless the Corporation’s book value exceeds the previous highest level in book value, or the “high water mark,” plus a 6% growth in book value, i.e., the hurdle rate (which has been corrected in the Incentive Agreement attached as Annex A to this proxy statement to clarify that the hurdle rate is not cumulative. As such, in a fiscal year in which book value declines, the marker for subsequent fiscal years will require the complete recovery of the deficit from the last high water mark plus attaining the stated 6% hurdle rate before Mr. Biglari is eligible for a bonus.>>

 

With the key comment above being, "to clarify that the hurdle rate is not cumulative", which I would interpret, the company could post 0% growth in book value for two years at show an 8% growth in year three and he would get 25% of the 2% excess even though he underperformed in years 2 and 3. What a deal.

 

I think this is a very good topic to bring up, but it seems ridiculous to think that he would get payed a bonus on the example above where he earns returns of yr1= 0% yr2 =0% and yr3=8%.

 

To take it one step further lets say he earns a return of 5% for years 1,2, & 3. In that case the numbers wouldn't have been over the hurdle and thus it would have been Mr. Biglari self interest for compensation purposes to earn 0% for years 1 and 2 and 8% for year 3.

 

I hope someone can provide some more clarity b/c it seems like there is a conflict of interest that lies within this compensation structure.

 

 

 

[Parsad]

After a little more research, I don't think the 6% bogey is cumulative....(here is an excerpt from the SEC filing for the plan)...

 

<<High Water Mark . Under the Incentive Agreement, Mr. Biglari will not receive incentive compensation under the Incentive Agreement unless the Corporation’s book value exceeds the previous highest level in book value, or the “high water mark,” plus a 6% growth in book value, i.e., the hurdle rate (which has been corrected in the Incentive Agreement attached as Annex A to this proxy statement to clarify that the hurdle rate is not cumulative. As such, in a fiscal year in which book value declines, the marker for subsequent fiscal years will require the complete recovery of the deficit from the last high water mark plus attaining the stated 6% hurdle rate before Mr. Biglari is eligible for a bonus.>>

 

With the key comment above being, "to clarify that the hurdle rate is not cumulative", which I would interpret, the company could post 0% growth in book value for two years at show an 8% growth in year three and he would get 25% of the 2% excess even though he underperformed in years 2 and 3. What a deal.

 

I saw the original version when it was published.  So this corrected version says that he just has to hit the high watermark plus 6% and he gets compensated.  So he could lose 5% in year 1, lose another 5% in year two, and he would just have to recover those losses plus 6% in year 3...not recover the losses, plus 6% compounded each year.  If that is true, then shareholders should be asking questions...but he'll probably just tell you to sell the stock if you don't like it! 

 

I wish the compensation plan in my fund was like that!  ;D  Well, actually I don't, because it would simply enrich me when I don't truly deserve it.  Cheers!