John Main took the reins as CEO of Alligator Energy Limited’s (ASX:AGE) and grew market cap to A$5.37M recently. 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. Today we will assess Main’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 Alligator Energy
What has AGE 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. In the past year, AGE released negative earnings of -A$2.1M . However, this is an improvement on prior year’s loss of -A$9.7M, which may signal a turnaround since AGE 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 Main’s valued-adding activities. In the same year, Main’s total remuneration remained stable at A$59,130 since the previous year.
Is AGE overpaying the CEO?
While no standard benchmark exists, as compensation should be tailored to the specific company and market, we can evaluate a high-level yardstick to see if AGE is an outlier. This outcome helps investors ask the right question about Main’s incentive alignment. Normally, an Australian small-cap is worth around $140M, produces earnings of $10M, and remunerates its CEO at roughly $500,000 per year. Typically I’d use market cap and profit as factors determining performance, however, AGE’s negative earnings lower the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Main is being paid within the bounds of reasonableness. Overall, although AGE is unprofitable, it seems like the CEO’s pay is appropriate.
What this means for you:
Are you a shareholder? Hopefully this article has given you insight on how shareholders should think about AGE’s governance policies such as CEO pay. As an investor, you have the right to understand how the board thinks about management incentives, and also the right to vote for and against substantial CEO pay changes. Governance is a big factor in investing, and I encourage you to dig deeper into those that represent your voice on the board. To find out more about AGE’s governance, look through our infographic report of the company’s board and management.