Gideon Tahan took the reins as CEO of SerVision PLC’s (AIM:SEV) and grew market cap to £1.78M 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. Today we will assess Tahan’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 SerVision
What has been the trend in SEV’s earnings?
Profitability of a company is a strong indication of SEV’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Tahan’s performance. Over the last year SEV produced negative earnings of -$3.2M , which is a further decline from prior year’s loss of -$2.1M. Furthermore, on average, SEV has been loss-making in the past, with a 5-year average EPS of -$0.02. During times of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be a signal of some headwind. In any event, CEO compensation should represent the current state of the business. In the latest financial statments, Tahan’s total compensation grew by a mere 3.84% to $216,000. Although I couldn’t find information on the breakdown of Tahan’s pay, if some portion were non-cash items such as stocks and options, then fluxes in SEV’s share price can move the actual level of what the CEO actually receives.
Is SEV’s CEO overpaid relative to the market?
Despite the fact that one size does not fit all, as compensation should be tailored to the specific company and market, we can estimate a high-level base line to see if SEV deviates substantially from its peers. This outcome helps investors ask the right question about Tahan’s incentive alignment. Normally, a UK small-cap is worth around £696M, generates earnings of £67M, and pays its CEO circa £1M per year. Typically I’d use market cap and profit as factors determining performance, however, SEV’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Tahan is remunerated sensibly relative to peers. Overall, although SEV is loss-making, it seems like the CEO’s pay is reflective of the appropriate level.
What this means for you:
Are you a shareholder? Hopefully this article has given you insight on how shareholders should think about SEV’s governance policies such as CEO pay. As an investor, you have the right to understand how the board thinks about management incentives, and also the right to vote for and against substantial CEO pay changes. Governance is a big factor in investing, and I encourage you to dig deeper into those that represent your voice on the board. To find out more about SEV’s governance, look through our infographic report of the company’s board and management.