Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
This article argues that most companies reward managers based on short-term metrics like sales or earnings per share, which encourages bad capital allocation and hurts long-term value. The author believes investors should push for incentives that make managers think like owners. He highlights Tiny (a holding) and Constellation Software (not a holding), where founders take no salary and executives must use 40-80% of their bonus to buy company stock and hold it for years, aligning interests with shareholders.
One-sentence summary: The author argues that current incentive mechanisms for listed companies, which are predominantly based on short-term financial metrics, distort capital allocation and harm long-term shareholder value, and calls on investors to push for a shift toward long-term incentive plans rooted in an "owner's mindset." (Stance: [Cautious])
The article argues that most companies' incentive systems rely excessively on short-term financial metrics such as sales and earnings per share, leading management to neglect return on capital (ROC) and make decisions that undermine long-term value. The author believes that within the capital cycle analysis framework, management's capital allocation decisions—such as capital expenditure and acquisitions—directly determine the denominator in calculating return on capital. When long-term investors buy shares, they are effectively outsourcing future investment decisions to incumbent management. Therefore, incentive systems not only influence behavior but also reveal to investors how management will exercise control over the balance sheet.
However, the author observes that incentive systems often exacerbate behavioral weaknesses rather than aligning management interests with those of shareholders. In the author's own words: "They may be tied to excessively short-term metrics (for example, sales) or performance metrics which exclude consideration of capital deployment (earnings per share being the obvious example)." This means: "They may be linked to excessively short-term metrics (e.g., sales) or performance metrics that exclude capital deployment considerations (earnings per share being a clear example)." Such incentives ignore the long-term consequences of today's decisions, prioritizing growth over return on capital—the latter being the key driver of long-term shareholder returns.
The author argues that in companies with dispersed equity, board compensation committees typically hire consultants to implement "industry best practices," resulting in standardized compensation packages (high base salaries, annual cash bonuses, stock options, or LTIPs), which actually exacerbate short-term behavior. Even if annual bonuses are well-designed, they may overemphasize short-term financial metrics, tempting management to undertake costly acquisitions or delay necessary investments. While some companies have incorporated return on capital into KPIs, focusing solely on single-year returns still creates distortions, especially in capital-intensive industries with long-lived assets.
The author is cautious about equity grants, arguing that they do not align with shareholder interests as expected. In the author's own words: "Often little more than 'lottery tickets,' these grants reward management on the upside, which may be the result of factors beyond their control." This means: "These grants are often little more than 'lottery tickets,' rewarding management for upside gains that may result from factors beyond their control." Such rewards may merely shift costs from the income statement to shareholders, boosting profits but diluting returns. LTIPs are not necessarily better, as they often pay out high bonuses even when performance lags behind company targets. The author advocates for longer measurement periods and multi-year equity grants to promote strategic thinking.
The article uses portfolio company Tiny and non-portfolio company Constellation Software as examples to illustrate how carefully designed incentive systems can make management act like owners. The founders of both companies forgo base salaries and bonuses in favor of holding substantial equity, aligning closely with public shareholders. For other key senior managers, different arrangements are used: industry-average base salaries plus annual bonuses based on each division's return on capital and revenue growth.
| Company | Founder Incentives | Other Executive Incentives | Bonus Payment Method | Shareholding Requirement |
|---|---|---|---|---|
| Tiny (portfolio holding) | Forgo base salary and bonus, hold substantial equity | Industry-average base salary + annual bonus based on ROIC and revenue growth (no bonus if ROIC below threshold) | Paid in cash | 40-80% of bonus must be used to purchase shares in the open market |
| Constellation Software (non-portfolio) | Forgo base salary and bonus, hold substantial equity | Industry-average base salary + annual bonus based on ROIC and revenue growth | Paid in cash | 40-80% of bonus must be used to purchase shares, with shares held in escrow for at least 4 years |
This arrangement emphasizes key metrics of value creation and promotes long-term thinking by requiring managers to invest most of their compensation in company stock. The author notes that executives at Tiny and Constellation Software only profit when the stock price rises, in stark contrast to the norm at many listed companies where executives enrich themselves regardless of shareholder outcomes.
The core investment implication of the article is that investors should actively review and advocate for the incentive systems of portfolio companies, pushing them from "industry standards" toward "owner thinking." The author believes that while good incentives do not guarantee stock performance and bad incentives do not necessarily destroy value, incentives clearly indicate the outcomes management is required to prioritize, thereby shaping their behavior. As shareholders, investors should support boards in designing simple, long-term incentive plans from first principles. Institutional perspective bias note: The author uses their own portfolio company Tiny as a positive case; readers should be aware that this is a holder's perspective and may involve selection bias.
| Ticker | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Tiny | Hold & Observe | Positive case: Its incentive structure makes management act like owners; it is a position held by the author | Founders forgo base salary and bonuses, hold significant equity; executive bonuses are based on ROIC and revenue growth, with 40-80% of bonuses required to purchase shares |
| Constellation Software | Not specified | Positive case: Similar to Tiny, but the author does not hold a position; used as a comparison reference | Founders forgo base salary and bonuses, hold significant equity; executive bonuses are based on ROIC and revenue growth, with 40-80% of bonuses required to purchase shares and held in escrow for at least 4 years |