Leading Infinera Corporation (NASDAQ:INFN) since 2010, Tom Fallon took the company to a valuation of USD$1.29B and pocketed $4,082,816 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.
See our latest analysis for INFN In comparison, Fallon’s stock-based component stood at over 80% of total compensation over the past year. On the surface, it appears the CEO’s interests are aligned with Infinera’s as a large part of Fallon income is linked to the company’s performance. 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. INFN shareholders’ interests seem hardly aligned with management, given that the CEO received a 7.60% hike in the salary, while the company’s EPS dropped by -389.31%.
Is INFN overpaying the CEO?
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. After inputting INFN’s variables into the equation, CEO compensation exceeds what I would expect to be a reasonable level. This is because INFN delivered a negative income in the previous year, which makes any level of compensation above our benchmark. Generally, compared to CEO salaries of other small-cap companies, Fallon’s salary is above the appropriate level. INFN must have a good reason to be paying its CEO a sum of $4,082,816. Or else shareholders may be bearing the brunt of the cost.
Infinera’s CEO had a substantial raise in his salary, while the company faced a strong downturn in earnings, indicating that there may be some misalignment between executive management’s interests and that of the broader company. CEO compensation serve as a good indication for how well-aligned the company leader is with the rest of us shareholders. But it is certainly not enough to simply base your investment decision on this metric. 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 Infinera to see INFN’s fundamentals and whether it could be considered an undervalued opportunity.
PS. If you are not interested in Infinera anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.