Did Hill create value?CAP 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, CAP delivered negative earnings of -AU$980.17K . But this is an improvement on prior year’s loss of -AU$1.23M, which may signal a turnaround since CAP has been loss-making for the past five years, on average, with an EPS of -AU$0.023. As profits are moving up and up, CEO pay should be reflective of Hill’s hard work. In the same year, Hill’s total remuneration increased by a mere 4.07% to AU$255.25K. Furthermore, Hill’s pay is also made up of 8.42% non-cash elements, which means that fluxes in CAP’s share price can move the real level of what the CEO actually takes home at the end of the day.
Is CAP overpaying the CEO?
Though there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can evaluate a high-level base line to see if CAP deviates substantially from its peers. This exercise can help shareholders ask the right question about Hill’s incentive alignment. Typically, an Australian small-cap has a value of $140M, produces earnings of $10M, and remunerates its CEO circa $500,000 per annum. Typically I would look at market cap and earnings as a proxy for performance, however, CAP’s negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Hill is being paid within the bounds of reasonableness. Putting everything together, even though CAP is unprofitable, it seems like the CEO’s pay is appropriate.
In order to determine whether or not you should invest in CAP, your thesis should be built on fundamentals. Even though CEO pay isn’t technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how CAP makes money, and factors impacting your return on investment. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Governance: To find out more about CAP’s governance, look through our infographic report of the company’s board and management.
- 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.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of CAP? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!