Leading Resources & Energy Group Limited (ASX:REZ) as the CEO, Richard Poole took the company to a valuation of AUDA$12.44M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Poole’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 Resources & Energy Group
What has been the trend in REZ’s earnings?
Profitability of a company is a strong indication of REZ’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Poole’s performance. Over the last year REZ released negative earnings of -A$1.4M , which is a further decline from prior year’s loss of -A$1.4M. Furthermore, on average, REZ has been loss-making in the past, with a 5-year average EPS of -A$0.03. During times of negative earnings, the company may be facing a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should mirror the current state of the business. In the latest financial report, Poole’s total compensation fell by a substantial rate of -37.50%, to A$33,000. Although I couldn’t find information on the breakdown of Poole’s pay, if some portion were non-cash items such as stocks and options, then fluxes in REZ’s share price can move the actual level of what the CEO actually takes home at the end of the day.
Is REZ overpaying the CEO?
Despite the fact that no standard benchmark exists, since remuneration should account for specific factors of the company and market, we can evaluate a high-level yardstick to see if REZ is an outlier. This exercise can help shareholders ask the right question about Poole’s incentive alignment. Normally, an Australian small-cap has a value of $140M, generates earnings of $10M, and pays its CEO circa $500,000 per year. Usually I’d use market cap and profit as factors determining performance, however, REZ’s negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Poole is paid aptly compared to those in similar-sized companies. On the whole, even though REZ is loss-making, it seems like the CEO’s pay is sound.