David Reid took the helm as Delphi Energy Corp’s (TSE:DEE) CEO and grew market cap to CA$166.99m 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. I will break down Reid’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 DEE’s performance been like?Earnings is a powerful indication of DEE’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Reid’s performance in the past year. In the past year, DEE released negative earnings of -CA$5.72m . However, this is an improvement on prior year’s loss of -CA$38.22m, which may signal a turnaround since DEE has been loss-making for the past five years, on average, with an EPS of -CA$0.14. Given earnings are moving the right way, CEO pay should represent Reid’s value creation for shareholders. During this period Reid’s total remuneration increased by 45.18% to CA$690.07k. In addition to this, Reid’s pay is also made up of 30.85% non-cash elements, which means that variabilities in DEE’s share price can impact the actual level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Though one size does not fit all, since remuneration should account for specific factors of the company and market, we can estimate a high-level base line to see if DEE is an outlier. This outcome can help direct shareholders to ask the right question about Reid’s incentive alignment. On average, a Canadian small-cap is worth around $345M, creates earnings of $24M, and remunerates its CEO at roughly $770,000 per annum. Typically I would look at market cap and earnings as a proxy for performance, however, DEE’s negative earnings lower the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Reid is being paid within the bounds of reasonableness. On the whole, although DEE is loss-making, it seems like the CEO’s pay is appropriate.
CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Reid remunerated appropriately based on other factors we have not covered today? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Governance: To find out more about DEE’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 DEE? 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.