Ken Nilsson has been at the helm as CEO of Troy Resources Limited (ASX:TRY), which has grown to a market capitalization of AUDA$39.98M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. I will break down Nilsson’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 Troy Resources
What has been the trend in TRY’s earnings?
Earnings is a powerful indication of TRY’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Nilsson’s performance in the past year. Most recently, TRY produced negative earnings of -A$148.2M , which is a further decline from prior year’s loss of -A$10.4M. Furthermore, on average, TRY has been loss-making in the past, with a 5-year average EPS of -A$0.02. In the situation of unprofitability the company may be facing a period of reinvestment and growth, or it can be a signal of some headwind. In any event, CEO compensation should represent the current condition of the business. In the most recent financial report, Nilsson’s total compensation declined by -7.03%, to A$595,670. In addition to this, Nilsson’s pay is also made up of 2.33% non-cash elements, which means that fluctuations in TRY’s share price can move the true level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
Though no standard benchmark exists, since compensation should be tailored to the specific company and market, we can fashion a high-level benchmark to see if TRY deviates substantially from its peers. This exercise helps investors ask the right question about Nilsson’s incentive alignment. Normally, an Australian small-cap is worth around $140M, creates earnings of $10M, and remunerates its CEO at roughly $500,000 per year. Normally I would look at market cap and earnings as a proxy for performance, however, TRY’s negative earnings lower the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Nilsson’s pay outstrips those in comparable companies.
What this means for you:
Are you a shareholder? TRY may be paying its CEO above-market rates due to many reasons – retention, reward, or inflated non-cash components of total pay. However, shareholders also should be aware of what the appropriate level is. Boards should be transparent with how they structure CEO pay given that there should be nothing to hide in public companies. Hopefully this analysis has given you the basis for questioning the next CEO pay raise. To find out more about TRY’s governance, look through our infographic report of the company’s board and management.