Tony McDonald has been at the helm as CEO of Santana Minerals Limited (ASX:SMI), which has grown to a market capitalization of AUDA$9.48M. 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 McDonald’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. Check out our latest analysis for Santana Minerals
What has been the trend in SMI’s earnings?
Profitability of a company is a strong indication of SMI’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for McDonald’s performance. Over the last year SMI released negative earnings of -A$4.7M , which is a further decline from prior year’s loss of -A$2.5M. Moreover, on average, SMI has been loss-making in the past, with a 5-year average EPS of -A$0.04. In the situation of unprofitability the company may be facing a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should echo the current state of the business. From the latest financial statments, McDonald’s total remuneration declined by a substantial rate of -27.34%, to A$207,697.
Is SMI overpaying the CEO?
Even though one size does not fit all, since compensation should account for specific factors of the company and market, we can gauge a high-level yardstick to see if SMI deviates substantially from its peers. This outcome helps investors ask the right question about McDonald’s incentive alignment. Typically, an Australian small-cap has a value of $140M, generates earnings of $10M, and remunerates its CEO circa $500,000 per year. Normally I’d use market cap and profit as factors determining performance, however, SMI’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like McDonald is paid aptly compared to those in similar-sized companies. On the whole, although SMI 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? CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is McDonald remunerated appropriately based on other factors we have not covered today? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. To find out more about SMI’s governance, look through our infographic report of the company’s board and management.