Is Fiat Chrysler Automobiles NV’s (BIT:FCA; NYSE:FCAU) CEO Compensation Aligned With Shareholder Interests?

By David Fisher
FCAU

Disclosure: The author of this report has a long position in Fiat Chrysler Automobiles NV (NYSE:FCAU; IM: FCA) and General Motors Company (NYSE:GM). Positions can change at any time without notice.
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Overview

At Perceptive, we believe compensation schemes are a major driver of business performance. Incentives matter: when CEO pay is aligned with shareholder interests it can have a major impact on investment success. In this article we determine if Fiat Chrysler Automobiles NV’s (“FCAU”; BIT:FCA; NYSE:FCAU) compensation is effectively structured.

Summary of FCAU Compensation Scheme

FCAU’s 2018 CEO compensation was structured as follows:

  • Base salary: U.S. $1.6 million
  • Short-term incentive (bonus): 150% – 300% of base salary subject to a threshold; based on 3 equally weighted metrics:
    • Adjusted EBIT
    • Adjusted net profit
    • Industrial net cash
  • Long-term incentive plan: subject to Board discretion; based on 2 equally weighted metrics:
    • Total shareholder return
    • Adjusted net profit
  • Pension and retirement savings: 3x annual base salary
  • Other: severance payout equal to 1x base linked to non-compete agreement

Compensation Is Aligned But Lacks ROIC Metric

We believe FCAU’s compensation scheme is generally aligned with shareholder’ interests. The key drivers of the bonus – adjusted EBIT, adjusted net profit, and industrial net cash (cash exceeding debt) are linked to FCAU’s profitability and financial strength which, in turn, should be key drivers of FCAU’s stock price in the long-term.

Moreover, FCAU’s long-term incentive plan clearly focuses on profitability (adjusted net profit) and shareholder benefits (total shareholder return). We therefore conclude that FCAU’s compensation and incentives are aligned with the interests of shareholder.

However, in our view, the company’s compensation plan does not adequately incentivize return on invested capital (ROIC). Empirical studies have shown that ROIC is a key driver of long-term stock performance. As such, we believe FCAU’s CEO should be compensated in-part based on this metric. Indeed, competitor General Motors Company (NYSE:GM) bases 50% of  its long-term incentive compensation on this metric.

Summing It Up

We believe FCAU’s CEO compensation is generally well-aligned with shareholder interests. However, we would like to see the company add a ROIC metric to incentivize this key driver of long-term share performance.