Does Pilot Energy Limited’s (ASX:PGY) CEO Salary Reflect Performance?

Benson Wong is the CEO of Pilot Energy Limited (ASX:PGY), which has recently grown to a market capitalization of A$2.92M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. I will break down Wong’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. See our latest analysis for Pilot Energy

Did Wong create value?

PGY 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, PGY delivered negative earnings of -A$1.4M . But this is an improvement on prior year’s loss of -A$3.2M, which may signal a turnaround since PGY has been loss-making for the past five years, on average, with an EPS of -A$1.99. Given earnings are moving the right way, CEO pay should represent Wong’s valued-adding activities. During the same period, Wong’s total compensation more than doubled, reaching A$85,567 , but from a small number.
ASX:PGY Past Future Earnings Jan 12th 18
ASX:PGY Past Future Earnings Jan 12th 18

What’s a reasonable CEO compensation?

While there is no cookie-cutter approach, as remuneration should account for specific factors of the company and market, we can evaluate a high-level benchmark to see if PGY is an outlier. This exercise can help direct shareholders to ask the right question about Wong’s incentive alignment. Typically, an Australian small-cap has a value of $140M, generates earnings of $10M, and remunerates its CEO circa $500,000 per year. Typically I would look at market cap and earnings as a proxy for performance, however, PGY’s negative earnings lower the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Wong is remunerated sensibly relative to peers. Overall, though PGY is unprofitable, it seems like the CEO’s pay is appropriate.

What this means for you:

Are you a shareholder? My conclusion is that Wong is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. To find out more about PGY’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 PGY, 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 PGY’s financial metrics.

PS. If you are not interested in Pilot Energy anymore, you can use our free platform to see my list of over 50 sustainable companies producing great returns.