Should You Worry About Baron Oil Plc’s (LON:BOIL) CEO Pay Check?

Malcolm Butler is the CEO of Baron Oil Plc (AIM:BOIL), which has recently grown to a market capitalization of UK£5.92M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. Today we will assess Butler’s pay and compare this to the company’s performance over the same period, as well as measure it against other UK CEOs leading companies of similar size and profitability. Check out our latest analysis for Baron Oil

Did Butler create value?

Profitability of a company is a strong indication of BOIL’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Butler’s performance. Recently, BOIL released negative earnings of -UK£1.54M , which is a further decline from prior year’s loss of -UK£32.00K. Additionally, on average, BOIL has been loss-making in the past, with a 5-year average EPS of -UK£0.0029. During times of unprofitability the company may be going through a period of reinvestment and growth, or it can be a signal of some headwind. In any case, CEO compensation should be reflective of the current condition of the business. In the latest report, Butler’s total compensation more than doubled, to UK£115.00K , but from a small number. Although I couldn’t find information on the composition of Butler’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in BOIL’s share price can impact the true level of what the CEO actually receives.
AIM:BOIL Income Statement Jun 5th 18
AIM:BOIL Income Statement Jun 5th 18

What’s a reasonable CEO compensation?

While one size does not fit all, as compensation should be tailored to the specific company and market, we can fashion a high-level benchmark to see if BOIL is an outlier. This outcome can help direct shareholders to ask the right question about Butler’s incentive alignment. Normally, a UK small-cap is worth around £696M, produces earnings of £67M, and pays its CEO at roughly £1M per year. Usually I would look at market cap and earnings as a proxy for performance, however, BOIL’s negative earnings reduces the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Butler is being paid within the bounds of reasonableness. Overall, although BOIL is loss-making, it seems like the CEO’s pay is sound.

Next Steps:

CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Butler remunerated appropriately based on other factors we have not covered today? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Governance: To find out more about BOIL’s governance, look through our infographic report of the company’s board and management.
  2. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  3. Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of BOIL? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!