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The deeper you dig into companies, the more dysfunction you find. This is not due to businesses being inherently broken, but rather because the incentives are flawed.
On the surface, stocks can look cheap. Screens flag low multiples, analyst notes highlight growth potential, and management sounds confident on the call. But beneath that narrative, capital often gets quietly misallocated. Empire-building creeps in. Decisions tilt toward boosting bonuses, not shareholder value. And the metrics that matter most, the ones buried in incentive structures and insider behavior, go ignored by most investors.
This is where the true significance emerges.
If you don’t monitor executive pay and insider moves, you’re overlooking potential value leaks or, crucially, unlocked opportunities. These aren’t soft signals. They’re hard tells. The clues are in the proxy filings, the timing of stock sales, and the structure of performance hurdles.
This issue isn’t about corporate morality. It’s about money. For investors who know where to look, misaligned governance isn’t a red flag; it’s a roadmap to alpha.
Capital Allocation. The Hidden Cost Of Ego
Capital allocation is where the quiet destruction of value often begins and it’s rarely about incompetence. It’s about incentives.
Expect empire building when a CEO’s bonus is based on top-line growth instead of return on invested capital (ROIC). That usually means overpaying for acquisitions, not because they’re strategic, but because they build legacy. Cash gets hoarded instead of returned, while buybacks and dividends are treated as afterthoughts, despite being the most shareholder-friendly tools available.
Look closer and you’ll see companies issuing millions in stock-based compensation while continuing to dilute shareholders by printing more shares. Others hang onto underperforming divisions year after year, not because they add value but because breaking them up would shrink the C-suite.
This isn’t hypothetical. We’ve seen it in sprawling conglomerates that refuse to divest low-ROIC segments, in tech firms obsessed with topline over profit, and in boards that rubber-stamp comp plans designed to reward size not efficiency.
The result? On paper, a stock appears inexpensive, yet it lacks the structural ability to increase value.
The investor takeaway is simple: Read the proxy. Please disregard the glossy investor deck. What’s buried in the footnotes of a compensation plan tells you far more than the income statement. Incentives, not narratives, dictate capital allocation in this context.
Executive Compensation: Where The Real Priorities Lie
At The Edge, we track dozens of these triggers across spinoffs, restructurings, and breakups. Why? Executive behavior concerning value unlocks more insights than any analyst report. When comp plans prioritize optics over outcomes, it’s a red flag. However, when the incentives align with the creation of real shareholder value, it’s a positive sign.
Take (VLTO): Prior to the spin from Danaher, we flagged their LTIP structure as heavily performance-driven, measured on metrics like ROIC and TSR over three years, not revenue padding. This clarity indicated that management was pursuing a long-term strategy, and the market has appropriately rewarded them. In contrast, (ILMN) became a textbook example of what happens when executive compensation favors empire-building over accountability.
Executive pay isn’t just about fairness, it’s about foresight. If management wins regardless of shareholder outcomes, you won’t.
Insider Behavior: The Tells You Can’t Ignore
In a world of carefully managed narratives, insider behavior is one of the few signals that’s hard to fake.
When insiders buy during periods of structural change, before the narrative becomes clear, it indicates strong conviction. When insiders are selling after the story has played out and retail investors have piled in, it often indicates a market peak. It’s not just about the transaction; it’s about timing, size, and frequency.
Does a solitary, minor purchase follow a challenging quarter? That’s merely surface-level activity. However, when multiple buys occur across management tiers, a phenomenon known as a bullish cluster, it signals a significant underlying trend.
(ECG) serves as a prime example. In February 2025, three insiders—Marcy Maximillian J, Ryan Edward A, and Michael Della Rocca—each bought stock worth between $49k and $53k within days of one another. There was no flashy announcement or hype. Instead, they acted with a quiet conviction.
Shortly after, ECG’s stock surged nearly 69%, well before the market narrative caught up.
Don’t chase headlines; track behavior. And when the people who know the business best put real capital to work, we take notice. In a noisy market, that kind of signal is gold.
Spinoffs: The Ultimate Incentive Transparency Test
If you want to see what management really believes, watch what happens during a spinoff.
Spinoffs compel executives to reveal their true intentions. Incentives get reset, structures rebuilt, and priorities laid bare, usually for the first time. The Form 10 is often more revealing than any investor deck, offering a raw look at how aligned (or not) leadership is with future shareholders.
What should investors watch for? Start with the comp plan. “Founder-like” pay structures where leadership takes equity over salary and ties it to long-term value creation are a bullish tell. If the former executives from the parent company maintain significant ownership in the spin-off and avoid selling their shares immediately after the separation, that is another positive indicator. When they tie equity awards to real performance hurdles (ROIC, TSR), rather than just revenue optics, it demonstrates their alignment with the right metrics.
In spinoffs, incentives reset and clarity reaches its peak. Study these transactions closely because they offer the cleanest read on intent. If the incentives align, value usually follows.
What Smart Investors Do Differently
Smart investors don’t just screen for valuation; they screen for behavior. They know governance isn’t a checkbox. It’s a signal.
They probe beyond the earnings deck to understand who, how, and why they are receiving compensation. They treat insider behavior and compensation structure as core parts of the thesis, not footnotes.
This is why you will outperform in special situations: You are not buying stories. You’re buying setups, where incentives align, risk is asymmetric, and behavior signals what spreadsheets can’t.
Value Is Leaking. Are You Watching?
Most investors chase earnings and price targets. But value doesn’t leak from spreadsheets; it leaks from boardrooms. You’re missing the setup and the upside if you’re not monitoring insiders’ actions, their compensation, and their beliefs. Incentives shape outcomes. Behavior reveals conviction. And in special situations, that’s where the real alpha lives.
On the date of publication, Jim Osman did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
