Pieter Slegers — The Power Of Incentives (Compounding Quality)

One-line take: the archive's clearest statement of how Compounding Quality assesses the unmeasurable half of a business. The premise is Einstein's — "not everything that can be counted counts" — applied to the things a spreadsheet cannot hold: CEO quality, culture, integrity. The proposed proxy is incentives, on Munger's instruction: "Never, ever, think about something else when you should be thinking about incentives." Two case studies show reward structures producing the opposite of the intended outcome — Xerox sold more of its inferior machine because commissions were higher on it, and Uber paying per completed ride was implicitly paying for speed, aggression and dirty cars until it re-based rewards on customer ratings and safety. The investing translation is a three-part compensation checklist: open-market purchases with cash (not share-based comp), skin in the game (shares owned worth far more than salary), and long-term targets like ROIC rather than quarterly numbers or the stock price. Culture is proxied by Glassdoor, with a stated threshold — "a good Glassdoor rating is usually above 3.5 out of 5." The applied example is Lotus Bakeries (Biscoff): 50.2% insider ownership, a 3.7 Glassdoor rating, 83% CEO approval, ~12% annual EPS growth for a decade — "And yet I don't own any shares… The reason? A high valuation."

1. Stocks & names mentioned

Lotus Bakeries is the only name analysed, and it is Neutral: every qualitative box is ticked and the post ends in an explicit pass on price. Xerox and Uber are behavioural case studies about incentive design, not investment views. KKR and MSCI are named in one line as current examples of insider buying. Research legend: QT Qualtrim · SA Seeking Alpha · STK Stock Analysis; the Brussels row points QT/SA at the US OTC symbol. Written post with no timestamps — the At link opens the article.

Stance = how each name is framed in this post. Xerox and Uber are illustrations of incentive design and carry no investment view; KKR and MSCI are one-line evidence for the insider-buying criterion. Only Lotus Bakeries is analysed, and the conclusion is a pass. Glassdoor is cited as a data source; the Credit Suisse family-ownership study and Ray Dalio's culture quote are references.

2. Talking points

Ticker	Name	Research	View	What he said	At
LOTB.BR	Lotus Bakeries NV	QT · SA · STK	Neutral	Admired on every qualitative test, then explicitly passed over on price. "Lotus Bakeries makes baked goods, most famously known for their speculoos cookies. You might know them through their brand Biscoff." Skin in the game: "50.2% (!) is owned by insiders," with CEO Jan Boone in post since 2011 and "a very attractive ROIC" throughout. Culture: "a rating of 3.7 stars on Glassdoor" and "83% of employees approve Jan Boone." Results: "grown its EPS by almost 12% per year for the last decade." Verdict: "Lotus Bakeries is a great example of an Owner-Operator stock. It has a deep moat. The numbers look great. And yet I don't own any shares… The reason? A high valuation." Also the personal note that frames it — "As a young investor, I struggled with home bias. My entire portfolio was invested in Belgian stocks. Today, I don't own any Belgian stocks."	read ↗
KKR	KKR & Co. Inc.	QT · SA · STK · FA	Neutral	Named in a single line as a live example of the checklist's first item: "Two great examples of companies where insiders are now buying shares? KKR and MSCI." No thesis or valuation here — the full write-up and the Best Buy #2 rating arrive a week later in March, where the same insider signal is cited as the confirming evidence.	read ↗
MSCI	MSCI Inc.	QT · SA · STK · FA	Neutral	Named alongside KKR as a company "where insiders are now buying shares" — cited as evidence for the open-market-purchase criterion rather than analysed. It becomes Best Buy #1 in March, where the same observation reappears as "Just like for KKR, insiders are heavily buying shares today."	read ↗
UBER	Uber Technologies	QT · SA · STK · FA	Neutral	An incentive-design case study, not an investment view. "In the 2010s, Uber rewarded its drivers for the number of rides completed. Sounds reasonable, but think about what Uber was really rewarding: Going faster / Driving more aggressively / Not taking time to clean up after the last ride." The correction is the point: "drivers are now rewarded based on customer ratings & safety. With just one change in incentives, the cars are cleaner, the drivers are polite, and you have a safe ride." No stance on the shares.	read ↗
XRX	Xerox Holdings	QT · SA · STK · FA	Neutral	The opening case study, historical. "Early on, Xerox only sold two products: An older, inferior machine / A newer, more advanced machine… It turns out that the inferior machine sold way better. The reason? Incentives. Salespeople got paid way more for selling the old product compared to the new one." The lesson stated: "You will always get more of what you reward. In this case, Xerox was rewarding the wrong thing." No view on the company today.	read ↗

The measurable and the decisive are different sets

"In the stock market, a lot can be counted: Sales / Profits / Debt levels / Returns on investment. But in business, some important things can't be measured. You can't calculate the quality of a CEO with a spreadsheet. You can't quantify culture. There's no formula to calculate integrity. But these things determine the long term success or failure of a business."
The solution offered is not to measure them but to find a proxy for how people will behave: "Luckily for investors, there's an easy way to understand how humans will behave. Incentives."

Xerox: paid to sell the worse product

Two machines, one clearly better; the inferior one outsold it because "salespeople got paid way more for selling the old product."
"You will always get more of what you reward. In this case, Xerox was rewarding the wrong thing." The useful generalisation: a sales mix that makes no product sense is usually a commission schedule, not a customer preference.

Uber: what "rides completed" actually pays for

Paying per completed ride reads as reasonable and is not: it rewards "going faster / driving more aggressively / not taking time to clean up after the last ride."
The complaints were the visible symptom; the metric was the cause. Re-basing rewards on customer ratings and safety fixed the behaviour without any other intervention — "With just one change in incentives, the cars are cleaner, the drivers are polite, and you have a safe ride."

Buffett on the deficit — incentives as a design tool

"I can fix the deficit problem within 5 minutes. You just pass a law that says every time the deficit is more than 3% of GDP, all sitting members of Congress can't be re-elected. Now you've got the incentives in the right place."
Quoted for the method rather than the policy: identify who bears no consequence for the outcome, and attach one.

Dumb incentive systems, and what they produce

Munger's formulation: "a dumb incentive system gives you dumb outcomes." The named example is quarterly earnings targets.
Three specific behaviours follow: "Underinvest: Cutting R&D and maintenance to beat expecations"; "Borrow from the future: Pulling sales forward, hurting next year's growth"; "Inflate EPS: Buying back expensive shares just to hit a bonus trigger."
The last one is the sharpest, because the archive elsewhere counts buybacks as shareholder return — here they are flagged as potentially a bonus-driven distortion. The distinction is the price paid.

The compensation checklist

Open Market Purchases — "Insiders get paid in cash and buy stock on the open market, preventing dilution from Share-Based Compensation (SBC)." Buying differs from being granted.
Skin in the Game — "The value of shares owned should be significantly higher than the manager's annual salary." A ratio, not a percentage, so it scales with company size.
Long-Term Targets — "Incentives tied to multi-year targets, like ROIC are much better than targets involving quarterly numbers or the stock price." Note the exclusion of the share price itself as a target.
Family-owned companies are offered as the structural shortcut, with a Credit Suisse study cited for long-run outperformance.
Live examples: "Two great examples of companies where insiders are now buying shares? KKR and MSCI."

Culture, and a usable proxy

Ray Dalio: "The key to having success is having the right people, and the key to having the right people is having the right culture."
The concession and the workaround: "I said earlier that culture can't be quantified. That's true, but we can get a good indication from Glassdoor ratings… As a rule of thumb, a good Glassdoor rating is usually above 3.5 out of 5."
Also a CEO-approval percentage, used on Lotus Bakeries (83%).

Lotus Bakeries — the checklist applied, and the pass

Framed by a personal correction: "As a young investor, I struggled with home bias. My entire portfolio was invested in Belgian stocks. Today, I don't own any Belgian stocks. But I do have one Belgian business on my radar."
Every criterion clears: 50.2% insider ownership, a CEO in post since 2011 with a sustained high ROIC, a 3.7 Glassdoor rating, 83% CEO approval, and ~12% annual EPS growth over a decade.
And the conclusion is still no: "The numbers look great. And yet I don't own any shares… The reason? A high valuation." The same discipline as FICO in March and HEICO and Eli Lilly later in the year.

Munger's closing admission

"I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes that I don't get some surprise that pushes my limit a little farther."
The three-line summary: "Compensation tied to long-term targets / A great corporate culture / High insider ownership."

3. In plain English

A jargon-free summary of the thesis behind each argued name. (Renders on each name's consolidated page.)

LOTB.BR — Lotus Bakeries NV Neutral

Lotus Bakeries is the Belgian company behind Biscoff — the caramelised speculoos biscuit served with coffee on aeroplanes, now also sold as a spread and baked into ice creams and chocolate. It is the worked example of this issue's argument that the things you cannot put in a spreadsheet are the ones that decide outcomes.

On those unmeasurable tests it scores about as well as a company can. Insiders own 50.2% of it, so the people running it lose far more than their salaries if they get it wrong. CEO Jan Boone has been there since 2011 and has kept returns on capital high throughout — the same person, the same standard, across a decade. Employees rate it 3.7 out of 5 on Glassdoor, above the 3.5 threshold Slegers uses, and 83% approve of the CEO. And the results follow: earnings per share have grown almost 12% a year for ten years.

Then comes the useful part. "The numbers look great. And yet I don't own any shares… The reason? A high valuation." A business can pass every governance and culture test you can devise and still be the wrong purchase at today's price. The framing detail is worth keeping too: Slegers mentions that he once held only Belgian stocks and now holds none, so this is a name he has deliberately kept on a watchlist rather than in the portfolio.

UBER — Uber Technologies Neutral

XRX — Xerox Holdings Neutral

Summary derived from the archived Compounding Quality post (text in transcript.txt) for personal study. Not investment advice. © Compounding Quality / Pieter Slegers for source material.