Should You Worry About Threat Protect Australia Limited’s (ASX:TPS) CEO Pay?

Demetrios Pynes took the helm as Threat Protect Australia Limited’s (ASX:TPS) CEO and grew market cap to AU$22.33M recently. 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 Pynes’s pay and compare this to the company’s performance over the same period, as well as measure it against other Australian CEOs leading companies of similar size and profitability. Check out our latest analysis for Threat Protect Australia

What has TPS’s performance been like?

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. Recently, TPS produced negative earnings of -AU$45.85K . But this is an improvement on prior year’s loss of -AU$58.91K, which may signal a turnaround since TPS has been loss-making for the past five years, on average, with an EPS of -AU$0.055. Since earnings are heading towards the right direction, CEO pay should mirror Pynes’s valued-adding activities. In the same year, Pynes’s total remuneration dropped by more than half of the prior year’s level, to AU$203.52K. Moreover, Pynes’s pay is also made up of non-cash elements, which means that variabilities in TPS’s share price can move the true level of what the CEO actually collects at the end of the year.
ASX:TPS Past Future Earnings Mar 28th 18
ASX:TPS Past Future Earnings Mar 28th 18

What’s a reasonable CEO compensation?

Despite the fact that one size does not fit all, as remuneration should be tailored to the specific company and market, we can evaluate a high-level thresold to see if TPS deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about Pynes’s incentive alignment. Typically, an Australian small-cap is worth around $140M, creates earnings of $10M, and remunerates its CEO circa $500,000 annually. Typically I would use earnings and market cap to account for variations in performance, however, TPS’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Pynes is remunerated sensibly relative to peers. On the whole, even though TPS is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.

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 Pynes 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 TPS’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 TPS? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!