Skip to content Investments Shares Stock market. Investments 0. Which type of fund focuses on investments that pay high dividends and interest? Most preference shares have a fixed dividend, while common stocks generally do not. Investors buy bonds because: They provide a predictable income stream. They are the ones backing the organization financially. A happy investor means the financial security of your business.
So, what can you do to keep your investors happy? Reporting Regularly. Being left out will create complications that could also lead investors to stop investing. Regular updates will help in keeping the relationship with investors healthy. They want to know whether they invested in the right place or not. Ensuring that they have invested in the correct place is your duty.
Strong relationships with the existing investors will encourage new investors to invest in your business. Show them the graphs and charts showing the growth of the business. Show them the report stating how a business or a particular software is performing in the market.
The report must include the revenue, market share, and profit details about the business or a particular software they invested in are generating. This will convince them that their share and capital is safe. Sharing Good News. If there is any great news about the business, then share this news with the investors also.
And see it for yourself how happy they will be. Let them celebrate together with you when something good is going on. This also helps to build a strong relationship with investors. The investors will feel satisfied and positive about the business. Examples of good news could be rapid sales of software, revenue generated by software in a month, and so on.
Why would anyone pay market price for a minority stake? He notes, however, that his father is not likely to seek an outside partner. So far, Henry has not taken the bait. One may want to stay; others may not. All that complicates the transaction. We try to balance compensation and the premise of one day there being more money at the end of the rainbow. Two years ago Bob Jung looked back at the history of Trico Corporation, the lubrication-machine reliability manufacturer and service company his grandfather founded in , and felt daunted.
Jung is quick to point out that the company was not in dire need of ownership changes. For the most part, everyone got along. With the help of a covey of consultants, the family spent 22 months carving out and implementing a plan to reorganize ownership. Jung, 53, says he had a hard time rallying support from the inactive shareholders. Part of the plan had Jung become the sole owner as of last November, but he is paying for the shares he bought back over four years, financed by a bank loan.
Don passed away early this year. It was owned by various family members who leased the property to Trico Corporation as a way to provide inactive owners with a tax-deductible to the company cash flow stream for the shareholders.
What everyone wanted to be happy was far bigger than the pie was. So we had to go through discussions and iterations. Finally, when options are hopelessly underwater, they lose their ability to motivate at all.
And that happens more frequently than is generally believed. For example, about one-third of all options held by U. But the supposed remedies—increasing cash compensation, granting restricted stock or more options, or lowering the exercise price of existing options—are shareholder-unfriendly responses that rewrite the rules in midstream.
Value-conscious companies can overcome the shortcomings of standard employee stock options by adopting either a discounted indexed-option plan or a discounted equity risk option DERO plan. To provide management with a continuing incentive to maximize value, companies can lower exercise prices for indexed options so that executives profit from performance levels modestly below the index. Companies can address the other shortcoming of standard options—holding periods that are too short—by extending vesting periods and requiring executives to hang on to a meaningful fraction of the equity stakes they obtain from exercising their options.
For companies unable to develop a reasonable peer index, DEROs are a suitable alternative. Treasury note plus a fraction of the expected equity risk premium minus dividends paid to the holders of the underlying shares. Equity investors expect a minimum return consisting of the risk-free rate plus the equity risk premium. But this threshold level of performance may cause many executives to hold underwater options.
By incorporating only a fraction of the estimated equity risk premium into the exercise price growth rate, a board is betting that the value added by management will more than offset the costlier options granted. Dividends are deducted from the exercise price to remove the incentive for companies to hold back dividends when they have no value-creating investment opportunities. While properly structured stock options are useful for corporate executives, whose mandate is to raise the performance of the company as a whole—and thus, ultimately, the stock price—such options are usually inappropriate for rewarding operating-unit executives, who have a limited impact on overall performance.
A stock price that declines because of disappointing performance in other parts of the company may unfairly penalize the executives of the operating units that are doing exceptionally well. In neither case do option grants motivate executives to create long-term value. Companies typically have both annual and long-term most often three-year incentive plans that reward operating executives for exceeding goals for financial metrics, such as revenue and operating income, and sometimes for beating nonfinancial targets as well.
The trouble is that linking bonuses to the budgeting process induces managers to lowball performance possibilities. More important, the usual earnings and other accounting metrics, particularly when used as quarterly and annual measures, are not reliably linked to the long-term cash flows that produce shareholder value. To create incentives for an operating unit, companies need to develop metrics such as shareholder value added SVA. To calculate SVA, apply standard discounting techniques to forecasted operating cash flows that are driven by sales growth and operating margins, then subtract the investments made during the period.
Because SVA is based entirely on cash flows, it does not introduce accounting distortions, which gives it a clear advantage over traditional measures. To ensure that the metric captures long-term performance, companies should extend the performance evaluation period to at least, say, a rolling three-year cycle.
The program can then retain a portion of the incentive payouts to cover possible future underperformance. This approach eliminates the need for two plans by combining the annual and long-term incentive plans into one. Instead of setting budget-based thresholds for incentive compensation, companies can develop standards for superior year-to-year performance improvement, peer benchmarking, and even performance expectations implied by the share price.
Although sales growth, operating margins, and capital expenditures are useful financial indicators for tracking operating-unit SVA, they are too broad to provide much day-to-day guidance for middle managers and frontline employees, who need to know what specific actions they should take to increase SVA.
For more specific measures, companies can develop leading indicators of value, which are quantifiable, easily communicated current accomplishments that frontline employees can influence directly and that significantly affect the long-term value of the business in a positive way. Examples might include time to market for new product launches, employee turnover rate, customer retention rate, and the timely opening of new stores or manufacturing facilities.
My own experience suggests that most businesses can focus on three to five leading indicators and capture an important part of their long-term value-creation potential.
The process of identifying leading indicators can be challenging, but improving leading-indicator performance is the foundation for achieving superior SVA, which in turn serves to increase long-term shareholder returns. For the most part, option grants have not successfully aligned the long-term interests of senior executives and shareholders because the former routinely cash out vested options. The ability to sell shares early may in fact motivate them to focus on near-term earnings results rather than on long-term value in order to boost the current stock price.
To better align these interests, many companies have adopted stock ownership guidelines for senior management. Minimum ownership is usually expressed as a multiple of base salary, which is then converted to a specified number of shares. For other executives, the corresponding number is three times salary. Top managers are further required to retain a percentage of shares resulting from the exercise of stock options until they amass the stipulated number of shares.
But in most cases, stock ownership plans fail to expose executives to the same levels of risk that shareholders bear. One reason is that some companies forgive stock purchase loans when shares underperform, claiming that the arrangement no longer provides an incentive for top management. Such companies, just as those that reprice options, risk institutionalizing a pay delivery system that subverts the spirit and objectives of the incentive compensation program.
Stock grants motivate key executives to stay with the company until the restrictions lapse, typically within three or four years, and they can cash in their shares. These grants create a strong incentive for CEOs and other top managers to play it safe, protect existing value, and avoid getting fired. In an effort to deflect the criticism that restricted stock plans are a giveaway, many companies offer performance shares that require not only that the executive remain on the payroll but also that the company achieve predetermined performance goals tied to EPS growth, revenue targets, or return-on-capital-employed thresholds.
Companies need to balance the benefits of requiring senior executives to hold continuing ownership stakes and the resulting restrictions on their liquidity and diversification. Companies seeking to better align the interests of executives and shareholders need to find a proper balance between the benefits of requiring senior executives to have meaningful and continuing ownership stakes and the resulting restrictions on their liquidity and diversification.
Without equity-based incentives, executives may become excessively risk averse to avoid failure and possible dismissal. If they own too much equity, however, they may also eschew risk to preserve the value of their largely undiversified portfolios. Better disclosure not only offers an antidote to short-term earnings obsession but also serves to lessen investor uncertainty and so potentially reduce the cost of capital and increase the share price. This statement:. The corporate performance statement provides a way to estimate both things by separating realized cash flows from forward-looking accruals.
The first part of this statement tracks only operating cash flows. It does not replace the traditional cash flow statement because it excludes cash flows from financing activities—new issues of stocks, stock buybacks, new borrowing, repayment of previous borrowing, and interest payments. The second part of the statement presents revenue and expense accruals, which estimate future cash receipts and payments triggered by current sales and purchase transactions.
Management estimates three scenarios—most likely, optimistic, and pessimistic—for accruals of varying levels of uncertainty characterized by long cash-conversion cycles and wide ranges of plausible outcomes. Could such specific disclosure prove too costly?
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