Does Gravitas Financial Inc’s (CNSX:GFI) CEO Pay Compare Well With Peers?

David Carbonaro is the CEO of Gravitas Financial Inc (CNSX:GFI), which has recently grown to a market capitalization of CA$3.99m. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Carbonaro’s pay and compare this to the company’s performance over the same period, as well as measure it against other Canadian CEOs leading companies of similar size and profitability. View out our latest analysis for Gravitas Financial

What has been the trend in GFI’s earnings?

Profitability of a company is a strong indication of GFI’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Carbonaro’s performance. In the past year, GFI released negative earnings of -CA$26.63m , which is a further decline from prior year’s loss of -CA$13.29m. Additionally, on average, GFI has been loss-making in the past, with a 5-year average EPS of -CA$0.26. In the situation of unprofitability the company may be facing a period of reinvestment and growth, or it can be a sign of some headwind. In any event, CEO compensation should mirror the current state of the business. From the latest financial report, Carbonaro’s total compensation remained stable at CA$284.00k since the previous year.
CNSX:GFI Income Statement July 3rd 18
CNSX:GFI Income Statement July 3rd 18

What’s a reasonable CEO compensation?

Despite the fact that no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can estimate a high-level base line to see if GFI deviates substantially from its peers. This exercise helps investors ask the right question about Carbonaro’s incentive alignment. Typically, a Canadian small-cap is worth around $345M, generates earnings of $24M, and pays its CEO circa $770,000 annually. Normally I would use earnings and market cap to account for variations in performance, however, GFI’s negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Carbonaro is remunerated sensibly relative to peers. On the whole, even though GFI is loss-making, it seems like the CEO’s pay is appropriate.

Next Steps:

Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in GFI, 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:

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