Nick Fitzgerald took the helm as TV2U International Limited’s (ASX:TV2) CEO and grew market cap to AUDA$30.16M 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 Fitzgerald’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 TV2U International
What has TV2 performance been like?
Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Most recently, TV2 delivered negative earnings of -A$9.8M . However, this is an improvement on prior year’s loss of -A$14.2M, which may signal a turnaround since TV2 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 be reflective of Fitzgerald’s hard work. Over the same period Fitzgerald’s total remuneration rose by 6.33% to A$350,000. Although I couldn’t find information on the composition of Fitzgerald’s pay, if some portion were non-cash items such as stocks and options, then fluxes in TV2’s share price can move the real level of what the CEO actually receives.
What’s a reasonable CEO compensation?
Even though there is no cookie-cutter approach, since remuneration should be tailored to the specific company and market, we can gauge a high-level thresold to see if TV2 deviates substantially from its peers. This outcome can help shareholders ask the right question about Fitzgerald’s incentive alignment. Normally, an Australian small-cap has a value of $140M, creates earnings of $10M, and pays its CEO circa $500,000 per annum. Normally I’d use market cap and profit as factors determining performance, however, TV2’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Fitzgerald is being paid within the bounds of reasonableness. Putting everything together, though TV2 is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.
What this means for you:
Are you a shareholder? In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose an executive pay raise. Will this raise take Fitzgerald’s pay beyond the bound of reasonableness, or will it help in retaining the talented executive? Being proactive in governance decisions is a key part to investing, and collectively, investors can make a big difference. To find out more about TV2’s governance, look through our infographic report of the company’s board and management.