Why Faron Pharmaceuticals Oy’s (AIM:FARN) CEO Pay Check Matters To You

Markku Jalkanen took the reins as Faron Pharmaceuticals Oy’s (AIM:FARN) CEO in 2007. 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 Jalkanen’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. View our latest analysis for Faron Pharmaceuticals Oy

What has FARN performance been like?

Earnings is a powerful indication of FARN’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Jalkanen’s performance in the past year. Over the last year FARN released negative earnings of -£13M , which is a further decline from prior year’s loss of -£7M. Furthermore, on average, FARN has been loss-making in the past, with a 5-year average EPS of -£0.27. In the situation of negative earnings, the company may be facing a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should emulate the current state of the business. In the latest financial report, Jalkanen’s total compensation increased by 23.95% to £280,964. Although I couldn’t find information on the composition of Jalkanen’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in FARN’s share price can impact the actual level of what the CEO actually takes home at the end of the day.
AIM:FARN Income Statement Nov 2nd 17
AIM:FARN Income Statement Nov 2nd 17

Is FARN overpaying the CEO?

Despite the fact that one size does not fit all, as compensation should account for specific factors of the company and market, we can estimate a high-level benchmark to see if FARN deviates substantially from its peers. This outcome helps investors ask the right question about Jalkanen’s incentive alignment. Generally, a UK small-cap is worth around £696M, generates earnings of £67M, and pays its CEO at roughly £1M per annum. Usually I’d use market cap and profit as factors determining performance, however, FARN’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Jalkanen is paid aptly compared to those in similar-sized companies. Putting everything together, though FARN is loss-making, it seems like the CEO’s pay is appropriate.

What this means for you:

Are you a shareholder? 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 Jalkanen 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. To find out more about FARN’s governance, look through our infographic report of the company’s board and management.

Are you a potential investor? Whether Jalkanen is over or underpaid should not be a deciding factor whether or not you invest in FARN. However, the way the company is governed and policies, such as remuneration, are structured, are important considerations for an investor. The best place to start is to understand how well FARN is placed financially. To research more about these fundamentals, I recommend you check out our simple infographic report on FARN’s financial metrics.

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