Leading Cervantes Corporation Limited (ASX:CVS) as the CEO, Collin Vost took the company to a valuation of AU$4.88M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Vost’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 Cervantes
What has CVS’s performance been like?
Earnings is a powerful indication of CVS’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Vost’s performance in the past year. In the past year, CVS delivered negative earnings of -AU$416.27K , which is a further decline from prior year’s loss of -AU$264.10K. Moreover, on average, CVS has been loss-making in the past, with a 5-year average EPS of -AU$0.0008. In the situation of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should represent the current state of the business. From the latest financial statments, Vost’s total compensation increased over two-fold, reaching AU$117.77K , although from a small basis. Furthermore, Vost’s pay is also made up of 66.25% non-cash elements, which means that variabilities in CVS’s share price can affect the actual level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
Though there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can determine a high-level thresold to see if CVS deviates substantially from its peers. This exercise can help shareholders ask the right question about Vost’s incentive alignment. Typically, an Australian small-cap has a value of $140M, produces earnings of $10M, and remunerates its CEO circa $500,000 per year. Normally I would use earnings and market cap to account for variations in performance, however, CVS’s negative earnings lower the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Vost is remunerated sensibly relative to peers. Putting everything together, though CVS is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.