Maynard Smith took the helm as Byron Energy Limited’s (ASX:BYE) CEO and grew market cap to AUDA$133.57M 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. I will break down Smith’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 Byron Energy
What has been the trend in BYE’s earnings?
Profitability of a company is a strong indication of BYE’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Smith’s performance. Over the last year BYE delivered negative earnings of -$5.4M . But this is an improvement on prior year’s loss of -$30.9M, which may signal a turnaround since BYE has been loss-making for the past five years, on average, with an EPS of -$0.06. As profits are moving up and up, CEO pay should echo Smith’s valued-adding activities. In the same year, Smith’s total remuneration increased by 82.73% to $212,938. Although I couldn’t find information on the composition of Smith’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in BYE’s share price can impact the actual level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
While no standard benchmark exists, as remuneration should be tailored to the specific company and market, we can evaluate a high-level yardstick to see if BYE is an outlier. This outcome can help shareholders ask the right question about Smith’s incentive alignment. Normally, an Australian small-cap is worth around $140M, produces earnings of $10M, and pays its CEO at roughly $500,000 per year. Usually I’d use market cap and profit as factors determining performance, however, BYE’s negative earnings reduces the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Smith is remunerated sensibly relative to peers. On the whole, although BYE is loss-making, it seems like the CEO’s pay is fair.
What this means for you:
Are you a shareholder? CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Smith remunerated appropriately based on other factors we have not covered today? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. To find out more about BYE’s governance, look through our infographic report of the company’s board and management.