Should You Worry About Ophir Energy Plc’s (LSE:OPHR) CEO Salary Level?

Nick Cooper has been at the helm as CEO of Ophir Energy Plc (LSE:OPHR), which has grown to a market capitalization of GBP£466.16M. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Cooper’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 Ophir Energy

What has been the trend in OPHR’s earnings?

Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Most recently, OPHR delivered negative earnings of -£114M . However, this is an improvement on prior year’s loss of -£240M, which may signal a turnaround since OPHR has been loss-making for the past five years, on average, with an EPS of -£0.18. Since earnings are heading towards the right direction, CEO pay should mirror Cooper’s hard work. In the same year, Cooper’s total compensation dropped by a meaningful rate of -48.28%, to £811,000. Although I couldn’t find information on the breakdown of Cooper’s pay, if some portion were non-cash items such as stocks and options, then fluxes in OPHR’s share price can affect the true level of what the CEO actually takes home at the end of the day.
LSE:OPHR Past Future Earnings Nov 13th 17
LSE:OPHR Past Future Earnings Nov 13th 17

What’s a reasonable CEO compensation?

Despite the fact that one size does not fit all, as compensation should be tailored to the specific company and market, we can determine a high-level base line to see if OPHR deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about Cooper’s incentive alignment. On average, a UK small-cap is worth around £696M, produces earnings of £67M, and remunerates its CEO circa £1M per annum. Typically I would use earnings and market cap to account for variations in performance, however, OPHR’s negative earnings lower the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Cooper is remunerated sensibly relative to peers. Putting everything together, though OPHR is loss-making, it seems like the CEO’s pay is fair.

What this means for you:

Are you a shareholder? You can breathe easy knowing that shareholder funds aren’t being used to overpay OPHR’s CEO. However, on the flipside, you should ask whether Cooper is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. To find out more about OPHR’s governance, look through our infographic report of the company’s board and management.

Are you a potential investor? While CEO compensation is a good indication for how well-aligned the company leader is its investors, it is certainly not enough to simply base your investment decision on this metric. Regardless of whether Cooper’s pay is above or below peers, the more important factors to look at is OPHR’s track record of performance and future outlook moving forward. To research more about these fundamentals, I recommend you check out our simple infographic report on OPHR’s financial metrics.

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