The Importance of Incentives

First, the size gap between the two companies was enormous. GameStop, with a market capitalization of nearly US$11 billion, was proposing to acquire eBay, whose market capitalization stood at approximately US$56 billion. You read that correctly: GameStop was attempting to acquire a company five times its size! It was the proverbial frog trying to swallow the ox.

Second, the interview that GameStop’s CEO gave to CNBC to explain the proposed transaction was rather amusing. During the interview, CNBC’s Andrew Ross Sorkin tried to understand how Ryan Cohen, GameStop’s CEO, planned to finance an acquisition of that magnitude. The only answer he received from Cohen was to consult the details on the company’s website and that half of the deal would be paid in cash and the other half in stock. As a result, the phrase “half cash, half stock” quickly went viral in the investment world.

Beyond this somewhat bizarre episode, I found myself questioning GameStop’s motivation for pursuing such a large acquisition. Were there meaningful potential synergies between the two businesses? Was vertical integration between GameStop’s physical retail model (primarily stores) and eBay’s online marketplace a realistic possibility? Could the combined company realistically compete with Amazon? Without having studied the situation in depth, I had serious doubts.

As I reflected on these questions, I remembered that in January 2026 the board of directors had proposed a new compensation package that also made headlines. Under the terms of the plan, Mr. Cohen would receive no base salary and no bonus. Instead, he would be compensated through GameStop stock options if he succeeded in generating extraordinary growth. More specifically, he would be entitled to acquire nearly 171 million options at an exercise price of US$20.66 per share, subject to achieving certain milestones:

In simple terms, if GameStop reaches a market capitalization of US$100 billion and cumulative EBITDA of US$10 billion, Mr. Cohen would be able to exercise all his options. At first glance, one might argue that he would deserve substantial compensation if he managed to increase the company’s market capitalization from US$10 billion to US$100 billion.

However, this type of compensation structure encourages a CEO to grow the company at almost any cost. The objective is clear: increase market capitalization and EBITDA. Excessive use of debt, large-scale acquisitions, and excessive share issuance are all strategies that can be used to achieve those goals.

Charlie Munger once said: “Show me the incentive and I’ll show you the outcome.” When Mr. Cohen proposed the large eBay transaction, his objective was likely to increase GameStop’s market capitalization and EBITDA. In my view, this type of compensation structure encourages executives to take considerable risks, which could ultimately have serious consequences for shareholders.

Although this compensation plan was abandoned last June, the fact remains that it was seriously considered in the first place. To me, that represents a significant red flag, even though Mr. Cohen is himself a major shareholder of GameStop. When analyzing a company, we always examine compensation structures carefully and consider the potentially negative behaviors they may encourage.

This type of arrangement is not unique to GameStop. Throughout my career, I have seen several compensation structures that I would describe as “questionable.” While no compensation model is perfect, it is generally best to avoid those that are least aligned with investors’ interests. Whether you are a stock market investor or a business executive, it is important to remember that financial incentives typically drive the future behavior of the people subject to them.

Jean-Philippe Legault, CFA
Senior Portfolio Manager at COTE 100