Beware of bad incentives

Want to know how to predict the future? Check management’s incentives.

Management remuneration and incentives are a critical but often overlooked part of company analysis. While good managers can produce incredible sums of money over long periods, such as Warren Buffett at Berkshire Hathaway or Brian McNamee at CSL, managers guided by poorly constructed incentive structures can destroy businesses and your investment.

The market was caught off guard recently when Newcrest Mining announced a $5.6bn write off. But the writing was on the wall for anyone that read page 40 of Newcrest’s 2009 annual report.

NCM LTI excerpt Source: Newcrest Mining 2009 Annual Report

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