We penalise companies which have a high level of total executive compensation relative to industry peers for both sales and pre-tax profit. In these instances, we are concerned that management is taking money out the company at the expense of shareholders.
Unfortunately, data is only available for 28% of the 16,000 companies in our global sample, mostly from developed markets such as the US and the UK. There is significant variance by industry, as the two charts show. In general, high margin sectors record greater management compensation as a percentage of sales and pre-tax profit. Low margin retail businesses have relatively lower management compensation relative to sales.
Our accounting screen is set to trigger a red flag when executive compensation to sales or pre-tax profits exceed the 80th percentile (i.e. they are very high) relative to GICS industry peers.