Pat Ward took the helm as Painted Pony Energy Ltd’s (TSE:PONY) CEO and grew market cap to CA$492.65m recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Ward’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.
Did Ward create value?Profitability of a company is a strong indication of PONY’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Ward’s performance. Over the last year PONY released an earnings of CA$10.10m , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of CA$54.57m. Given that PONY has been loss-making in the past, hopefully this decline isn’t a reversion back to historical trends. In the situation of falling profits, the company may be going through a period of reinvestment and growth, or it can be an indication of some headwind. Regardless, CEO compensation should represent the current condition of the business. From the latest financial statments, Ward’s total remuneration grew by 37.72% to CA$1.82m. Furthermore, Ward’s pay is also made up of 61.65% non-cash elements, which means that variabilities in PONY’s share price can affect the actual level of what the CEO actually collects at the end of the year.
Is PONY’s CEO overpaid relative to the market?Despite the fact that no standard benchmark exists, as remuneration should be tailored to the specific company and market, we can determine a high-level thresold to see if PONY deviates substantially from its peers. This outcome helps investors ask the right question about Ward’s incentive alignment. Normally, a Canadian small-cap is worth around $345M, creates earnings of $24M, and remunerates its CEO circa $770,000 annually. Taking into account the size of PONY in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Ward is paid higher than other Canadian CEOs of small-caps, on average. Even though this is only a rudimentary calculation, investors should be cognizant of this expense.
What this means for you:
My analysis shows that Ward may be paid above the appropriate level, based on the size of PONY and its recent year’s earnings performance. The question to answer now is whether this level of pay is justified. There are most likely other factors I have not account for, but in any case, this outcome should provide a basis for you as shareholders, to question the board’s decision to increase CEO pay in the future. 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 PONY’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 PONY? 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.