Is RHC Capital Corporation (CVE:RHC) Overpaying Its CEO?

Zoran Arandjelovic took the reins as CEO of RHC Capital Corporation’s (TSXV:RHC) and grew market cap to CA$10.57M 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 Arandjelovic’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 RHC Capital

What has RHC’s performance been like?

Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. In the past year, RHC delivered negative earnings of -CA$815.17K . But this is an improvement on prior year’s loss of -CA$6.13M, which may signal a turnaround since RHC has been loss-making for the past five years, on average, with an EPS of -CA$0.061. Given earnings are moving the right way, CEO pay should mirror Arandjelovic’s valued-adding activities. Over the same period Arandjelovic’s total compensation fell by a substantial rate of -38.24%, to CA$275.72K. In addition to this, Arandjelovic’s pay is also made up of 9.90% non-cash elements, which means that fluctuations in RHC’s share price can impact the true level of what the CEO actually takes home at the end of the day.
TSXV:RHC Past Future Earnings Apr 30th 18
TSXV:RHC Past Future Earnings Apr 30th 18

Is RHC overpaying the CEO?

Despite the fact that there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can gauge a high-level thresold to see if RHC is an outlier. This outcome helps investors ask the right question about Arandjelovic’s incentive alignment. Typically, a Canadian small-cap has a value of $345M, generates earnings of $24M, and remunerates its CEO circa $770,000 annually. Normally I’d use market cap and profit as factors determining performance, however, RHC’s negative earnings reduces the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Arandjelovic is remunerated sensibly relative to peers. On the whole, even though RHC is loss-making, it seems like the CEO’s pay is appropriate.

Next Steps:

Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in RHC, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

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