Is CES Energy Solutions Corp’s (TSE:CEU) CEO Pay Justified?

Tom Simons is the CEO of CES Energy Solutions Corp (TSX:CEU), which has recently grown to a market capitalization of CA$1.68B. 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 Simons’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. Check out our latest analysis for CES Energy Solutions

What has been the trend in CEU’s earnings?

Profitability of a company is a strong indication of CEU’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Simons’s performance. In the past year, CEU produced an earnings of CA$36.24M , moving CEU from negative territory of -CA$64.55M in the prior year to profitability. Though, the variability in earnings over the last few years makes us less confidence in forecasting future outcome based on past data. As profits are moving up and up, CEO pay should be reflective of Simons’s value creation for shareholders. During this period Simons’s total compensation more than doubled, reaching CA$1.61M . In addition to this, Simons’s pay is also made up of 38.58% non-cash elements, which means that fluxes in CEU’s share price can affect the true level of what the CEO actually collects at the end of the year.
TSX:CEU Past Future Earnings Apr 23rd 18
TSX:CEU Past Future Earnings Apr 23rd 18

Is CEU overpaying the CEO?

While one size does not fit all, as remuneration should account for specific factors of the company and market, we can determine a high-level thresold to see if CEU is an outlier. This outcome helps investors ask the right question about Simons’s incentive alignment. Normally, a Canadian small-cap is worth around $345M, generates earnings of $24M, and pays its CEO circa $770,000 per year. Allowing for CEU’s size and performance, in terms of market cap and earnings, it seems that Simons is paid more than the average Canadian small-cap CEO. Although this is only a basic calculation, shareholders should be aware of this expense.

What this means for you:

CEU may be paying its CEO above-market rates due to many reasons – retention, reward, or inflated non-cash components of total pay. However, shareholders also should be aware of what the appropriate level is. Boards should be transparent with how they structure CEO pay given that there should be nothing to hide in public companies. Hopefully this analysis has given you the basis for questioning the next CEO pay raise. 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 CEU’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 CEU? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!