Giulio Casello took the helm as Sundance Resources Limited’s (ASX:SDL) CEO and grew market cap to AUDA$38.13M 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 Casello’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 Sundance Resources
What has SDL performance been like?
Profitability of a company is a strong indication of SDL’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Casello’s performance. In the past year, SDL delivered negative earnings of -A$4.7M . But this is an improvement on prior year’s loss of -A$102.9M, which may signal a turnaround since SDL has been loss-making for the past five years, on average, with an EPS of -A$0.01. Since earnings are heading towards the right direction, CEO pay should mirror Casello’s valued-adding activities. Over the same period Casello’s total compensation grew by 11.94% to A$737,974. In addition to this, Casello’s pay is also comprised of non-cash elements, which means that fluxes in SDL’s share price can affect the actual level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Though there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can estimate a high-level benchmark to see if SDL is an outlier. This exercise helps investors ask the right question about Casello’s incentive alignment. Normally, an Australian small-cap has a value of $140M, creates earnings of $10M, and pays its CEO at roughly $500,000 annually. Typically I’d use market cap and profit as factors determining performance, however, SDL’s negative earnings reduces the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Casello’s pay exceeds its peer group.
What this means for you:
Are you a shareholder? The next CEO pay bump should be questioned by shareholders at AGM voting. Given that Casello’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. To find out more about SDL’s governance, look through our infographic report of the company’s board and management.