Did Winter create value?HPL can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. In the past year, HPL released negative earnings of -CA$2.01m , which is a further decline from prior year’s loss of -CA$844.59k. Furthermore, on average, HPL has been loss-making in the past, with a 5-year average EPS of -CA$0.13. In the situation of negative earnings, the company may be going through a period of reinvestment and growth, or it can be an indication of some headwind. In any case, CEO compensation should be reflective of the current condition of the business. In the most recent financial report, Winter’s total remuneration grew by 22.79% to CA$120.00k. Moreover, Winter’s pay is also comprised of non-cash elements, which means that fluxes in HPL’s share price can affect the actual level of what the CEO actually receives.
Is HPL overpaying the CEO?
Despite the fact that no standard benchmark exists, as compensation should be tailored to the specific company and market, we can determine a high-level base line to see if HPL deviates substantially from its peers. This exercise can help shareholders ask the right question about Winter’s incentive alignment. Typically, a Canadian small-cap is worth around $345M, generates earnings of $24M, and pays its CEO circa $770,000 per year. Usually I would use earnings and market cap to account for variations in performance, however, HPL’s negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Winter is paid aptly compared to those in similar-sized companies. Putting everything together, even though HPL is loss-making, it seems like the CEO’s pay is reflective of the appropriate level.
My conclusion is that Winter is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. 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 HPL’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 HPL? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!