Two River Bancorp (TRCB): Is CEO Being Overpaid?

Bill Moss took the reins as Two River Bancorp’s (NASDAQ:TRCB) CEO in 2010 and earned a total compensation of $498,066 over the past year. There has been an increasing movement towards CEOs receiving a large chunk of their compensation through company shares. In 2015, approximately 60% of total compensation for S&P500 CEOs were stock-based incentives. This creates a stronger alignment between executive management interests and those of shareholders.

View our latest analysis for Two River Bancorp In comparison, stock-based incentives make up a smaller part of total compensation for Moss last year, at 17.17%. An explanation for why Moss’s compensation is lighter on stock relative to peers may be due to the fact that stock-based payouts are tied to company performance, and TRCB’s earnings last year came in lower than expectations. However, over the past year, TRCB actually delivered positive earnings growth. Unless the CEO is already a significant shareholder in the company, there is room for improvement in TRCB’s executive compensation structure to foster higher alignment with shareholders. Another case that could raise some red flags is an abnormal situation in which the CEO receives a large jump in compensation, while EPS dropped in the opposite direction. This is a useful test to find significant mismatch between executive earnings and company earnings. However, in the case of TRCB, shareholders need not worry about the mismatch. In the past year, earnings grew 32.97%, while CEO compensation rose by 6.22%, which isn’t significant.
NasdaqGM:TRCB CEO Details Aug 11th 17
NasdaqGM:TRCB CEO Details Aug 11th 17

What’s a reasonable CEO compensation?

Maximum CEO Comp = (0.5% * Net Income + 0.03% * Market Cap)
The compensation structure for executive management has been a highly debated subject. The question has generally been around what the right balance is to keep the CEO motivated while maintaining a reasonable cost to shareholders. Reforms in financial regulations have now mandated companies to provide detailed description of their executive remuneration structure, helping investors assess whether the pay is indeed based on performance. Above is a simple equation I use to determine whether the compensation of S&P500 CEOs are paid at the appropriate level compared to the rest of the market. Using the equation with TRCB’s data, the output tells us that its CEO compensation is acceptable. This means that Two River Bancorp is not paying its CEO too much compared to how much net income was generate last year, and relative to other CEOs in companies with a similar market cap.

Final words

Salary paid by Two River Bancorp to its CEO seems slightly out of the line compared to market standards. The company should opt for a more performance-based compensation structure with a higher stock-based incentive component. Although CEO remuneration can be a useful sign for the alignment between a company’s CEO and its performance, it is certainly not sufficient to base your investment decision solely on this factor. Now that you know to keep in mind CEO compensation when putting together your investment thesis, I recommend you take a look at our latest free analysis report on Two River Bancorp to see TRCB’s fundamentals and whether it could be considered an undervalued opportunity.

PS. If you are not interested in Two River Bancorp anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.