The One Thing You Need to Know About eBay

I know it sounds ludicrous, but investors often overlook the people in charge of protecting their investments. The idea of gauging a company's leadership plays second-fiddle other categories of analysis. However, at Fool.com we believe careful study of effective leadership is one of the most important areas of evaluating long-term winning investments.

We like CEOs who actually work for shareholders like us. After all, we're the true owners of the business. When you're deciding whether to invest in a company, failing to vet its CEO is a big mistake. In fact, if you've overlooked the study of a company's leadership, then that's the one important area you should know about before finalizing your investment in the company.

After reviewing thousands of companies over dozens of years, we've found several crucial characteristics of quality management. Today, we'll size up the recent performance of eBay's (Nasdaq: EBAY) leadership.

How much skin do they have in the game?
Are eBay CEO John Donahoe's interests aligned with shareholders? Here's how the eBay CEO's ownership compares to that of his peers.

Source: Capital IQ, a division of Standard & Poor's.

John Donahoe actually owns $3 million worth of eBay, or 0.01% of shares outstanding. We prefer seeing CEOs who have a higher ownership in their businesses. This aligns their interests with shareholders. It's worth noting however that while we regard high inside ownership as a positive sign, having low inside ownership shouldn't necessarily be a red flag. CEOs may be relatively new or may have a low percent of shares outstanding, but a high total value of ownership.

How well are they using your money?
Return on equity can help investors determine how adeptly management gets the job done. This metric combines how well management is expanding profitability, managing assets, and using financial leverage, all in one ratio. While return on equity isn't foolproof -- managers can manipulate it with excessive leverage, for example -- it does an excellent job of suggesting how effective managers are, and how well they can generate high returns on investors' capital.

Here's a look at eBay's recent return on equity:

Despite difficult economic conditions, eBay has managed to grow return on equity over its five-year average. That's speaks well of management and shows that the company has continued finding ways to increase returns on shareholder capital. Consistently increasing return on equity shows that management is either adept at cutting costs and managing assets or is moving the company into new high-return areas.

How productive are their workers?
Revenue per employee provides another way to gauge a CEO's effectiveness. If this metric is declining, the company might have a bloated organizational structure, or too many extra employees toiling away at new initiatives that just aren't working out. Either possibility would hint that management isn't effectively running the organization.

Source: Capital IQ, a division of Standard & Poor's.

As you can see, eBay's revenue per employee has increased its five-year average. Rising revenue per employee can be a sign of management better controlling costs or getting better production out of employees. To better see management is excelling in this area, let's compare the company to its peer group once again:

Source: Capital IQ, a division of Standard & Poor's. Dollar figures in thousands.

eBay's revenue per employee has shown growth in the past five years. However, it's worth noting that revenue per employee growth still lags its peer group. While eBay has been successful, in relative terms it has fallen below the results of comparable companies.

These are just a few of the factors we look for in a company's management. If you can find leaders who continually give shareholders high returns on their capital, and align their interests with yours, you've got a better chance to enjoy market-beating returns for the long haul.