Stephen Biggins took the helm as Core Exploration Limited's (ASX:CXO) CEO and grew market cap to AU$33.58M recently. 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. I will break down Biggins’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 Core Exploration
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Did Biggins create value?
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, CXO delivered negative earnings of -AU$2.38M , which is a further decline from prior year's loss of -AU$1.95M. Furthermore, on average, CXO has been loss-making in the past, with a 5-year average EPS of -AU$0.017. In the situation of unprofitability the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should mirror the current condition of the business. In the latest report, Biggins's total compensation grew by a mere 3.40% to AU$304.29K. Furthermore, Biggins's pay is also made up of 11.34% non-cash elements, which means that fluctuations in CXO's share price can affect the real level of what the CEO actually takes home at the end of the day. ASX:CXO Income Statement Jun 5th 18
Is CXO overpaying the CEO?
Even though there is no cookie-cutter approach, as remuneration should account for specific factors of the company and market, we can fashion a high-level yardstick to see if CXO deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Biggins’s incentive alignment. Typically, an Australian small-cap is worth around $140M, produces earnings of $10M, and pays its CEO at roughly $500,000 annually. Typically I would look at market cap and earnings as a proxy for performance, however, CXO's negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Biggins is paid aptly compared to those in similar-sized companies. Overall, even though CXO is loss-making, it seems like the CEO’s pay is sound.
Next Steps:
Board members are the voice of shareholders. Although CEO pay doesn't necessarily make a big dent in your investment thesis in CXO, 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. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
About ASX:CXO
Core Lithium
Engages in the development of lithium and various metal deposits in Northern Territory and South Australia.
