Jeff Olsen took the helm as Boart Longyear Limited’s (ASX:BLY) CEO and grew market cap to A$262.88M recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. Today we will assess Olsen’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. Check out our latest analysis for Boart Longyear
What has been the trend in BLY’s earnings?
Profitability of a company is a strong indication of BLY’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Olsen’s performance. Over the last year BLY delivered negative earnings of -$168.9M . However, this is an improvement on prior year’s loss of -$247.1M, which may signal a turnaround since BLY has been loss-making for the past five years, on average, with an EPS of -$0.29. As profits are moving up and up, CEO pay should mirror Olsen’s value creation for shareholders. During the same period, Olsen’s total remuneration increased by 85.51% to $1,887,445.
What’s a reasonable CEO compensation?
Even though one size does not fit all, since compensation should account for specific factors of the company and market, we can estimate a high-level yardstick to see if BLY deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Olsen’s incentive alignment. Generally, an Australian small-cap is worth around $140M, creates earnings of $10M, and pays its CEO circa $500,000 per year. Typically I would look at market cap and earnings as a proxy for performance, however, BLY’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Olsen’s pay is above other similar companies.
What this means for you:
Are you a shareholder? The next CEO pay bump should be questioned by shareholders at AGM voting. Given that Olsen’s pay is already above the bracket of other CEOs of similar companies, what justifies a further increase? Although CEO pay is not the be all and end all, it serves as a signal as to whether the board’s and management’s incentives are aligned with the rest of the shareholders. To find out more about BLY’s governance, look through our infographic report of the company’s board and management.