Todd Brown took the reins as CEO of Cequence Energy Ltd’s (TSE:CQE) and grew market cap to CA$22.10m recently. 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 Brown’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 CQE’s performance been like?Profitability of a company is a strong indication of CQE’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Brown’s performance. Most recently, CQE produced negative earnings of -CA$108.34m , which is a further decline from prior year’s loss of -CA$16.92m. Furthermore, on average, CQE has been loss-making in the past, with a 5-year average EPS of -CA$0.24. During times 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. From the latest financial report, Brown’s total remuneration declined by -19.46%, to CA$521.89k. In addition to this, Brown’s pay is also made up of 35.84% non-cash elements, which means that fluxes in CQE’s share price can impact the true level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?Despite the fact that there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can fashion a high-level yardstick to see if CQE is an outlier. This exercise can help shareholders ask the right question about Brown’s incentive alignment. Generally, a Canadian small-cap is worth around $345M, produces earnings of $24M, and pays its CEO at roughly $770,000 annually. Normally I’d use market cap and profit as factors determining performance, however, CQE’s negative earnings reduces the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Brown is paid aptly compared to those in similar-sized companies. On the whole, even though CQE is loss-making, it seems like the CEO’s pay is sound.
In order to determine whether or not you should invest in CQE, 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 CQE makes money, and factors impacting your return on investment. 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 CQE’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 CQE? 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 email@example.com.