Executive compensation has been getting a lot of negative press lately but there are cases where high compensation is appropriate. Executive taking part in a spin-off are one of these instances of higher-than-average compensation yet also an instance of long-term outperformance by the stock!

Spin-offs are simply instances where a company divests an existing operating segment by taking it public on the NYSE or NASDAQ. The management teams running these new public companies are often the subordinates to executives running the parent company and therefore are less experienced. However, they are taking on a greater risk by running a spin-off as it has no track record and is often much smaller than the parent company.

Typically, executives of spin-offs are granted higher-than-normal options packages designed to incentivize management to take advantage of the proceeds and synergies obtained from the spin-off process. Despite the higher pay packages, spin-offs have been shown by several studies to outperform the overall stock market during their first two years in existance. This is attributable to several factors, but perhaps the most influencial are the synergies that executives capitalize on.