What has been the trend in RHC’s earnings?Profitability of a company is a strong indication of RHC’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Arandjelovic’s performance. Most recently, RHC produced negative earnings of -CA$0.8M . But this is an improvement on prior year’s loss of -CA$6.1M, which may signal a turnaround since RHC has been loss-making for the past five years, on average, with an EPS of -CA$0.06. As profits are moving up and up, CEO pay should mirror Arandjelovic’s value creation for shareholders. During this period Arandjelovic’s total remuneration fell by a substantial rate of -38.24%, to CA$275,715. Furthermore, Arandjelovic’s pay is also made up of 9.90% non-cash elements, which means that fluxes in RHC’s share price can impact the true level of what the CEO actually receives.
Is RHC overpaying the CEO?
While no standard benchmark exists, as compensation should account for specific factors of the company and market, we can estimate a high-level benchmark to see if RHC deviates substantially from its peers. This exercise helps investors ask the right question about Arandjelovic’s incentive alignment. Normally, a Canadian small-cap is worth around $345M, generates earnings of $24M, and remunerates its CEO circa $770,000 per annum. Normally I would look at market cap and earnings as a proxy for performance, however, RHC’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Arandjelovic is paid aptly compared to those in similar-sized companies. Putting everything together, though RHC is unprofitable, it seems like the CEO’s pay is sound.
My conclusion is that Arandjelovic 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 urge you to complete your research by taking a look at the following:
- 1. Governance: To find out more about WOW’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!