Is Ultima United Limited’s (ASX:UUL) CEO Paid At A Competitive Rate?

Leading Ultima United Limited (ASX:UUL) as the CEO, Simon Xing took the company to a valuation of AUDA$1.30M. 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 Xing’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 UUL

What has UUL performance been like?

Earnings is a powerful indication of UUL’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Xing’s performance in the past year. Most recently, UUL delivered negative earnings of -A$1.1M , which is a further decline from prior year’s loss of -A$0.4M. Furthermore, on average, UUL has been loss-making in the past, with a 5-year average EPS of -A$0.03. In the situation of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should mirror the current condition of the business. From the latest financial statments, Xing’s total remuneration declined by -13.20%, to A$168,401. Moreover, Xing’s pay is also comprised of non-cash items, which means that fluxes in UUL’s share price can affect the true level of what the CEO actually receives.
ASX:UUL Income Statement Dec 12th 17
ASX:UUL Income Statement Dec 12th 17

Is UUL overpaying the CEO?

Even though one size does not fit all, since remuneration should account for specific factors of the company and market, we can estimate a high-level yardstick to see if UUL is an outlier. This exercise can help shareholders ask the right question about Xing’s incentive alignment. Typically, an Australian small-cap is worth around $140M, creates earnings of $10M, and remunerates its CEO at roughly $500,000 annually. Typically I would look at market cap and earnings as a proxy for performance, however, UUL’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Xing is paid aptly compared to those in similar-sized companies. On the whole, though UUL is loss-making, it seems like the CEO’s pay is appropriate.

What this means for you:

Are you a shareholder? Hopefully this article has given you insight on how shareholders should think about UUL’s governance policies such as CEO pay. As an investor, you have the right to understand how the board thinks about management incentives, and also the right to vote for and against substantial CEO pay changes. Governance is a big factor in investing, and I encourage you to dig deeper into those that represent your voice on the board. To find out more about UUL’s governance, look through our infographic report of the company’s board and management.

Are you a potential investor? Whether Xing is over or underpaid should not be a deciding factor whether or not you invest in UUL. 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 UUL is placed financially. To research more about these fundamentals, I recommend you check out our simple infographic report on UUL’s financial metrics.

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