P. MacFarlane took the reins as CEO of Cathedral Energy Services Ltd’s (TSE:CET) and grew market cap to CA$53.43m 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. Today we will assess MacFarlane’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.
What has CET’s performance been like?Earnings is a powerful indication of CET’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of MacFarlane’s performance in the past year. Over the last year CET produced negative earnings of -CA$4.88m , compared to the previous year’s positive earnings. Additionally, CET hasn’t always been loss-making, with an average EPS of CA$0.091 over the past five years. In the situation of unprofitability the company may be incurring a period of reinvestment and growth, or it can be a signal of some headwind. Regardless, CEO compensation should emulate the current condition of the business. In the latest financial statments, MacFarlane’s total remuneration increased by 46.18% to CA$421.67k. In addition to this, MacFarlane’s pay is also made up of 27.32% non-cash elements, which means that fluxes in CET’s share price can affect the actual level of what the CEO actually collects at the end of the year.
Is CET overpaying the CEO?Though one size does not fit all, as remuneration should be tailored to the specific company and market, we can determine a high-level base line to see if CET deviates substantially from its peers. This exercise helps investors ask the right question about MacFarlane’s incentive alignment. On average, a Canadian small-cap is worth around $345M, produces earnings of $24M, and pays its CEO at roughly $770,000 per year. Typically I would look at market cap and earnings as a proxy for performance, however, CET’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like MacFarlane is being paid within the bounds of reasonableness. On the whole, though CET is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.
In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose an executive pay raise. Will this raise take MacFarlane’s pay beyond the bound of reasonableness, or will it help in retaining the talented executive? Being proactive in governance decisions is a key part to investing, and collectively, investors can make a big difference. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about CET’s governance, look through our infographic report of the company’s board and management.
- 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.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of CET? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.