Photo: Tax Credits

American Capital Ltd. (NASDAQ:ACAS) is getting a face lift. Or so it seems.

After halting its buyback program, the speculation is that American Capital will work to spin-out one of its best assets -- the asset management company, American Capital Asset Management.

The asset manager earns huge fees for managing American Capital Mortgage (NASDAQ:MTGE) and American Capital Agency (NASDAQ:AGNC), among other funds. With asset managers trading at a premium, it seems like an easy way to create value for shareholders.

But while we're on the topic of creating shareholder value for American Capital Ltd. shareholders, let's talk about the elephant in the room: Big paydays for executives.

Would you like options with that?
American Capital's insiders love to award themselves with big paydays in the form of stock. And it's not just an American Capital Ltd. problem. It happens at American Capital Asset Management, too.

Let's look at the numbers. The chart below compares stock-based and other compensation at American Capital Asset management to net operating income by year.

Pay for performance doesn't seem to exist. In 2013, American Capital Asset Management added only $296 million in fee-earning assets, according to its fourth-quarter presentation. That would translate into less than $4 million in annual revenue at an average fee of 1.25%. Despite this unimpressive performance, other compensation tallied to $55 million last year.

American Capital Asset Management is just one piece of American Capital Ltd puzzle, however. The holding company reveals even more stock-based compensation, this time in the form of American Capital Ltd. stock options. The annual report shows 54.1 million options at a weighted-average price of $9.13, well below the company's current price.

If exercised, American Capital shareholders would see the total diluted share count, adjusted for first-quarter buybacks, surge by an incredible 18%. I'm not surprised, either, to find that the buyback ended at a convenient time for insiders. Some 49.6 million of the 54.1 million options outstanding have exercise prices below the current share price.

Two birds with one stone
While American Capital Ltd. debates the best way to create value for shareholders, investors should continue to ask if they're getting what they're paying for.

American Capital's long history of aggressive stock issuance likely won't stop after a spin-off, and shareholders should question if the most obvious way to create shareholder value isn't with financial engineering, but reigning in excessive executive compensation.

A spin-off may change the company, but if it doesn't change the culture, the long-term benefits may flow first management, and secondly to shareholders.

It's high time for shareholders to be treated like investors, not second-class citizens.