Ashley Moore took the helm as Environmental Clean Technologies Limited’s (ASX:ESI) CEO and grew market cap to AUDA$46.31M 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 Moore’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 Environmental Clean Technologies
What has been the trend in ESI’s earnings?
Earnings is a powerful indication of ESI’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Moore’s performance in the past year. Most recently, ESI produced negative earnings of -A$4.4M , which is a further decline from prior year’s loss of -A$4.2M. Moreover, on average, ESI has been loss-making in the past, with a 5-year average EPS of -A$0. During times of unprofitability the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should emulate the current condition of the business. In the most recent report, Moore’s total remuneration grew by 23.09% to A$313,130.
Is ESI’s CEO overpaid relative to the market?
Despite the fact that there is no cookie-cutter approach, as remuneration should account for specific factors of the company and market, we can determine a high-level thresold to see if ESI deviates substantially from its peers. This exercise helps investors ask the right question about Moore’s incentive alignment. Typically, an Australian small-cap has a value of $140M, generates earnings of $10M, and pays its CEO at roughly $500,000 per annum. Typically I’d use market cap and profit as factors determining performance, however, ESI’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Moore is being paid within the bounds of reasonableness. On the whole, even though ESI 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? My conclusion is that Moore is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. To find out more about ESI’s governance, look through our infographic report of the company’s board and management.