Hemispherx Biopharma Inc’s (AMEX:HEB) valuation currently sits at USD$10.92M, and is lead by Tom Equels, who took the reins as CEO in 2016. Equels earned a total compensation of $805,570 over the past twelve months. It is believed that a strong indicator of alignment between executive management and shareholders occurs when the majority of the CEO’s compensation is stock-based. There’s confirmation in the market, with 60% of total compensation among S&P500 CEOs, on average, comprised of stock-based incentives.
Check out our latest analysis for Hemispherx Biopharma In comparison, stock-based incentives make up a smaller part of total compensation for Equels last year, at 3.39%. An explanation for why Equels’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 HEB’s earnings last year came in lower than expectations. However, over the past year, HEB actually delivered positive earnings growth. Unless the CEO is already a significant shareholder in the company, there is room for improvement in HEB’s executive compensation structure to foster higher alignment with shareholders. Another case that could raise red flags is a situation in which the CEO receives more than a 20% pay-hike while the company saw an earnings drop of more than 20%. I tested for this in order to identify companies with misalignment between executives and shareholders, and HEB shareholders can relax, as this is not the case for the company. In fact, while EPS grew by 48.15%, the CEO’s salary actually dropped by -30.01%, which is rather surprising.
Is HEB 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 that I use to judge whether HEB’s CEO salary level is reasonable. After inputting HEB’s variables into the equation, CEO compensation exceeds what I would expect to be a reasonable level. This is because HEB 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, Equels’s salary is above the appropriate level. HEB must have a good reason to be paying its CEO a sum of $805,570. Or else shareholders may be bearing the brunt of the cost.
Although the company faced negative earnings in the past year, Hemispherx Biopharma’s salary change remains relatively reasonable. 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 Hemispherx Biopharma to see HEB’s fundamentals and whether it could be considered an undervalued opportunity.
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