Is Cellnet Group Limited (ASX:CLT) Excessively Paying Its CEO?

Leading Cellnet Group Limited (ASX:CLT) as the CEO, Alan Sparks took the company to a valuation of AU$22.84M. 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 Sparks’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. Check out our latest analysis for Cellnet Group

Did Sparks create value?

Profitability of a company is a strong indication of CLT’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Sparks’s performance. In the past year, CLT produced an earnings of AU$2.76M , which is an increase of 72.75% from its last year’s earnings of AU$1.60M. This is a positive indication that CLT has strived to maintain a good track record of profitability in the face of any headwinds. Since earnings are heading towards the right direction, CEO pay should mirror Sparks’s value creation for shareholders. In the same year, Sparks’s total compensation increased by 85.07% to AU$668.50K.
ASX:CLT Past Future Earnings Mar 30th 18
ASX:CLT Past Future Earnings Mar 30th 18

Is CLT’s CEO overpaid relative to the market?

Despite the fact that one size does not fit all, as remuneration should account for specific factors of the company and market, we can evaluate a high-level base line to see if CLT is an outlier. This exercise helps investors ask the right question about Sparks’s incentive alignment. Generally, an Australian small-cap is worth around $140M, creates earnings of $10M, and remunerates its CEO circa $500,000 per year. Based on CLT’s size and performance, in terms of market cap and earnings, it seems that Sparks is paid more than other Australian CEOs of profitable small-caps. Though this is merely a basic estimate, shareholders should be cognizant of this expense.

What this means for you:

In order to determine whether or not you should invest in CLT, 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 CLT 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:

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