Did Cheng create value?BAL.H can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. Most recently, BAL.H produced negative earnings of -CA$0M , which is a further decline from prior year’s loss of -CA$0M. Additionally, on average, BAL.H has been loss-making in the past, with a 5-year average EPS of -CA$0. During times of unprofitability the company may be facing a period of reinvestment and growth, or it can be a sign of some headwind. In any event, CEO compensation should be reflective of the current condition of the business. From the latest financial statments, Cheng’s total compensation dropped by more than half of the prior year’s level, to CA$500. Although I couldn’t find information on the composition of Cheng’s pay, if some portion were non-cash items such as stocks and options, then variabilities in BAL.H’s share price can impact the true level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Despite the fact that one size does not fit all, since remuneration should be tailored to the specific company and market, we can evaluate a high-level yardstick to see if BAL.H deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about Cheng’s incentive alignment. Generally, a Canadian small-cap has a value of $345M, generates earnings of $24M, and remunerates its CEO circa $770,000 annually. Usually I’d use market cap and profit as factors determining performance, however, BAL.H’s negative earnings reduces the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Cheng is paid aptly compared to those in similar-sized companies. Putting everything together, although BAL.H 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? Hopefully this article has given you insight on how shareholders should think about BAL.H’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 BAL.H’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in BAL.H, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. To research more about these fundamentals, I recommend you check out our simple infographic report on BAL.H’s financial metrics.PS. If you are not interested in Balto Resources anymore, you can use our free platform to see my list of over 50 sustainable companies producing great returns.