Campbell Neal is the CEO of K2 Asset Management Holdings Ltd (ASX:KAM), which has recently grown to a market capitalization of AU$33.66M. 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. Today we will assess Neal’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 K2 Asset Management Holdings
What has been the trend in KAM’s earnings?
KAM can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. Recently, KAM produced a profit of AU$5.80M , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of AU$7.06M. However, KAM has strived to sustain a strong track record of generating profits, given its average EPS of AU$0.041 over the past couple of years. In the situation of declining earnings, the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. In any case, CEO compensation should mirror the current state of the business. From the latest financial report, Neal’s total remuneration dropped by a substantial rate of -45.47%, to AU$1.58M.
What’s a reasonable CEO compensation?
While there is no cookie-cutter approach, since compensation should be tailored to the specific company and market, we can evaluate a high-level yardstick to see if KAM deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Neal’s incentive alignment. On average, an Australian small-cap is worth around $140M, creates earnings of $10M, and pays its CEO at roughly $500,000 per year. Taking into account the size of KAM in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Neal is paid higher than the average Australian small-cap CEO. Although this is merely a basic calculation, investors should be aware of this expense.
What this means for you:
The next CEO pay bump should be questioned by shareholders at AGM voting. Given that Neal’s pay is already above the bracket of other CEOs of similar companies, what justifies a further increase? Although CEO pay is not the be all and end all, it serves as a signal as to whether the board’s and management’s incentives are aligned with the rest of the shareholders. If you have not done so already, I urge you to complete your research by taking a look at the following: