Should You Worry About Ultima United Limited’s (ASX:UUL) CEO Pay Check?

Simon Yan took the reins as CEO of Ultima United Limited’s (ASX:UUL) and grew market cap to AU$1.68M recently. 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. Today we will assess Yan’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 Ultima United

What has been the trend in UUL’s earnings?

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 Yan’s performance in the past year. In the past year, UUL produced negative earnings of -AU$377.46K . However, this is an improvement on prior year’s loss of -AU$1.12M, which may signal a turnaround since UUL has been loss-making for the past five years, on average, with an EPS of -AU$0.034. Since earnings are heading towards the right direction, CEO pay should be reflective of Yan’s hard work. During the same period, Yan’s total compensation declined by -13.20%, to AU$168.40K. Furthermore, Yan’s pay is also made up of non-cash elements, which means that fluctuations in UUL’s share price can move the real level of what the CEO actually takes home at the end of the day.
ASX:UUL Past Future Earnings Apr 3rd 18
ASX:UUL Past Future Earnings Apr 3rd 18

Is UUL overpaying the CEO?

While there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can evaluate a high-level benchmark to see if UUL deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Yan’s incentive alignment. Generally, an Australian small-cap has a value of $140M, creates earnings of $10M, and pays its CEO circa $500,000 per annum. Usually 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 Yan is paid aptly compared to those in similar-sized companies. Putting everything together, though UUL is loss-making, it seems like the CEO’s pay is fair.

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 Yan 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 highly recommend you to complete your research by taking a look at the following:

  1. Governance: To find out more about UUL’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 UUL? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!