We really wanted to like what we read in the recently-released proxy statement for Acuity Brands (AYI). In response to an awful say-on-pay result from the last proxy, AYI made some optically attractive changes. The company got rid of EPS as a metric for short-term and long-term comp. It even added an ROIC component to both short-term and long-term comp. However, the issue is that, when crafting the thresholds, AYI created a bar so low the company can literally not improve ROIC at all and still award its executives the maximum shares and fund 100% of the bonus pool.

To better understand our disappointment with the comp plan, let’s start with the below chart that highlights the company’s recent results:

As you can see, Adjusted ROIC over the last 3 years has been 18%+ and elsewhere within the proxy statement AYI identifies that its Weighted Average Cost of Capital (WACC) is 10%. Unfortunately, as the next chart shows, all the company has to do is generate an ROIC that beats the WACC by 3% to get the total bonus pool funded at target. If your starting point is 18%+ and your hurdle rate is now 13%, what is the point of using ROIC as a metric?!?!

This is an example of a comp plan that checks a lot of our boxes. AYI’s structure rightly focuses on ROIC and free cash flow. The issue is that unless a company sets targets and hurdle rates that are aggressive but achievable, there is a risk of compensating for mediocrity. We scrutinize the proxy statement precisely to find discrepancies and inconsistencies like this—and we are not bashful in respectfully voicing our concerns when we engage with company management.

– Ben Claremon, Principal + Portfolio Manger

(Source: AYI Company Filings)

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