Simon Lidington has been at the helm as CEO of Big Sofa Technologies Group PLC (AIM:BST), which has grown to a market capitalization of £7.63M. 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 Lidington’s pay and compare this to the company’s performance over the same period, as well as measure it against other UK CEOs leading companies of similar size and profitability. View our latest analysis for Big Sofa Technologies Group
What has been the trend in BST’s earnings?
Profitability of a company is a strong indication of BST’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Lidington’s performance. Recently, BST delivered negative earnings of -£5.6M , which is a further decline from prior year’s loss of -£1.0M. Furthermore, on average, BST has been loss-making in the past, with a 5-year average EPS of -£0.22. In the situation of unprofitability the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any event, CEO compensation should be reflective of the current condition of the business. From the latest report, Lidington’s total remuneration more than doubled, reaching £144,739 , but from a small number. Although I couldn’t find information on the composition of Lidington’s pay, if some portion were non-cash items such as stocks and options, then fluxes in BST’s share price can move the actual level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Though no standard benchmark exists, since compensation should be tailored to the specific company and market, we can estimate a high-level thresold to see if BST deviates substantially from its peers. This exercise can help shareholders ask the right question about Lidington’s incentive alignment. On average, a UK small-cap has a value of £696M, generates earnings of £67M, and pays its CEO at roughly £1M per year. Typically I’d use market cap and profit as factors determining performance, however, BST’s negative earnings reduces the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Lidington is remunerated sensibly relative to peers. Putting everything together, although BST is unprofitable, it seems like the CEO’s pay is appropriate.