Willie Labuschagne took the helm as Aeris Resources Limited’s (ASX:AIS) CEO and grew market cap to A$15.41M recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. I will break down Labuschagne’s pay and compare this to the company’s performance over the same period, as well as measure it against other Australian CEOs leading companies of similar size and profitability. View our latest analysis for Aeris Resources
Did Labuschagne create value?
Earnings is a powerful indication of AIS’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Labuschagne’s performance in the past year. In the past year, AIS delivered negative earnings of -A$33.3M , compared to the previous year’s positive earnings. However, on average, AIS has been loss-making in the past, with a 5-year average EPS of -A$0.93. In the situation of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be a signal of some headwind. In any case, CEO compensation should mirror the current condition of the business. In the latest report, Labuschagne’s total remuneration grew by 7.26% to A$1,083,040.
Is AIS’s CEO overpaid relative to the market?
While there is no cookie-cutter approach, since remuneration should be tailored to the specific company and market, we can determine a high-level base line to see if AIS deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Labuschagne’s incentive alignment. Generally, an Australian small-cap is worth around $140M, produces earnings of $10M, and remunerates its CEO circa $500,000 annually. Usually I would look at market cap and earnings as a proxy for performance, however, AIS’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Labuschagne’s pay exceeds its peer group.
What this means for you:
Are you a shareholder? My analysis shows that Labuschagne may be paid above the appropriate level, based on the size of AIS and its recent year’s earnings performance. The question to answer now is whether this level of pay is justified. There are most likely other factors I have not account for, but in any case, this outcome should provide a basis for you as shareholders, to question the board’s decision to increase CEO pay in the future. To find out more about AIS’s governance, look through our infographic report of the company’s board and management.