Alfred Chown took the reins as CEO of Energy Technologies Limited’s (ASX:EGY) and grew market cap to A$1.31M recently. 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 Chown’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. See our latest analysis for Energy Technologies
What has been the trend in EGY’s earnings?
Profitability of a company is a strong indication of EGY’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Chown’s performance. In the past year, EGY released negative earnings of -A$2.9M , which is a further decline from prior year’s loss of -A$2.1M. Moreover, on average, EGY has been loss-making in the past, with a 5-year average EPS of -A$0.01. During times of unprofitability 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. In the most recent financial report, Chown’s total remuneration fell by -9.69%, to A$315,961. Furthermore, Chown’s pay is also made up of 7.91% non-cash elements, which means that fluxes in EGY’s share price can move the actual level of what the CEO actually receives.
Is EGY overpaying the CEO?
While one size does not fit all, as compensation should account for specific factors of the company and market, we can fashion a high-level benchmark to see if EGY is an outlier. This exercise helps investors ask the right question about Chown’s incentive alignment. Generally, an Australian small-cap has a value of $140M, creates earnings of $10M, and remunerates its CEO at roughly $500,000 per annum. Normally I’d use market cap and profit as factors determining performance, however, EGY’s negative earnings reduces the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Chown is remunerated sensibly relative to peers. Putting everything together, though EGY is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.
What this means for you:
Are you a shareholder? You can breathe easy knowing that shareholder funds aren’t being used to overpay EGY’s CEO. However, on the flipside, you should ask whether Chown is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. To find out more about EGY’s governance, look through our infographic report of the company’s board and management.