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Hao Zheng took the helm as Sparkle Roll Group Limited’s (HKG:970) CEO and grew market cap to HK$1.36b recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Zheng’s pay and compare this to the company’s performance over the same period, as well as measure it against other SEHK-listed CEOs leading companies of similar size and profitability.
Check out our latest analysis for Sparkle Roll Group
What has 970’s performance been like?
Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. In the past year, 970 produced an earnings of HK$664.57m , which is an increase of 656.52% from its previous year’s earnings of HK$87.85m. This is a positive indication that 970 has strived to maintain a good track record of profitability in the face of any headwinds. Given earnings are moving the right way, CEO pay should represent Zheng’s valued-adding activities. Over the same period Zheng’s total compensation increased by a mere 1.16% to HK$2.00m.
What’s a reasonable CEO compensation?
While one size does not fit all, since remuneration should be tailored to the specific company and market, we can determine a high-level thresold to see if 970 deviates substantially from its peers. This exercise helps investors ask the right question about Zheng’s incentive alignment. Typically, a SEHK small-cap has a value of HK$2.61B, creates earnings of HK$245M, and pays its CEO at roughly HK$3.3M per annum. Taking into account the size of 970 in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Zheng is paid less than other similar SEHK CEOs in the small-cap industry.
Next Steps:
My conclusion is that Zheng is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
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Governance: To find out more about 970’s governance, look through our infographic report of the company’s board and management.
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Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
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Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of 970? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.