During his recent interview with Tobias, Mike Puangmalai, owner of The NonGaap Newsletter discussed how Companies Will “Spring Load” And “Bullet Dodge” Equity Grants To Benefit Insiders. Here’s an excerpt from the interview:
Tobias: You talk about using compensation. The two mechanisms are spring-loading options and bullet dodging. There’s this great part in your note where you say, this is why we use– you illustrated all three case studies. And you said the reason we use case studies is because there’s– I’m going to mangle what you wrote and folks should go and read it because it is so great. But you say that there’s some of these things are so nuanced, it’s impossible to articulate them. The way that you have to learn about them is just by doing lots of reps reading, lots of case studies, participating — The two examples you give sexing chicks and World War 2 spotting. Do you want to tell those stories?
Mike: [chuckles] This is my personal opinion when it– You can probably mechanically get a lot of the spring loading and bullet dodging dynamics down but compensation analysis is very vague theory-type approach where you have to blend what is the investor perspective? How does management thinking about this business from a strategy execution operations perspective? And then blend it in with governance and blend it in with compensation. Going back to sexing chicks or recognizing the right bombers are coming in– at least for me learning, to really appreciate what is signal versus what is noise, it really comes down to recognizing when are these grants truly telling you that there’s some bullishness or bearishness going on. The only way for me to learn that was to literally research the companies, do fundamental analysis, do all the things that all the investors do to try to understand the company and the value opportunity there. Then, take that experience and then blend it into how do you incentivize management teams to do what you think is necessary to execute.
That dynamic is open-ended. If I were to ask you, okay, you’re the board member on some company you want to incentivize or reward management for certain things, what can you do? The answer is very broad. So, when we talk about sexing chicks or recognizing the sound of bombers, it’s literally you’re taking out bats and you’re looking at pitchers. It’s almost teaching someone to recognize how to recognize a curveball. It’s like you can explain it but best way to do is get in the batter’s box, I’ll stand here from the umpire’s view and throw the pitch like, “What do you think that was?” “Oh, that was a fast ball.” “Okay, what’s his pitch?” “Oh, that’s a curveball.”
So, you get this dynamic where it’s like, okay, now you recognize what the pitch is. Can you anticipate what the pitch is? That’s a little bit harder. That requires a little bit more mentoring which like, “Okay, well, what kind of pitch do you think if you get 2-0 count?” Well, they’re probably not going to throw a curveball. It will probably be a fastball. It’s that anticipation, that endgame situational awareness that requires a little bit more training, or at least for me it required a little more training.
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