Is Chinook Energy Inc’s (TSE:CKE) CEO Salary Justified?

Walter Vrataric took the reins as CEO of Chinook Energy Inc’s (TSE:CKE) and grew market cap to CA$44.71m recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Vrataric’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. See our latest analysis for Chinook Energy

Did Vrataric create value?

Earnings is a powerful indication of CKE’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Vrataric’s performance in the past year. Recently, CKE delivered negative earnings of -CA$29.43m . However, this is an improvement on prior year’s loss of -CA$31.58m, which may signal a turnaround since CKE has been loss-making for the past five years, on average, with an EPS of -CA$0.24. Since earnings are heading towards the right direction, CEO pay should mirror Vrataric’s hard work. During the same period, Vrataric’s total compensation rose by 47.46% to CA$463.61k. Furthermore, Vrataric’s pay is also made up of 32.19% non-cash elements, which means that fluctuations in CKE’s share price can move the true level of what the CEO actually collects at the end of the year.
TSX:CKE Past Future Earnings July 3rd 18
TSX:CKE Past Future Earnings July 3rd 18

Is CKE’s CEO overpaid relative to the market?

Though one size does not fit all, since compensation should be tailored to the specific company and market, we can determine a high-level base line to see if CKE is an outlier. This exercise helps investors ask the right question about Vrataric’s incentive alignment. Generally, a Canadian small-cap is worth around $345M, creates earnings of $24M, and pays its CEO circa $770,000 per annum. Normally I’d use market cap and profit as factors determining performance, however, CKE’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Vrataric is being paid within the bounds of reasonableness. Overall, even though CKE is unprofitable, it seems like the CEO’s pay is appropriate.

Next Steps:

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 Vrataric’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 urge you to complete your research by taking a look at the following:

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