Why RHC Capital Corporation’s (CVE:RHC) CEO Pay Matters To You

Zoran Arandjelovic took the helm as RHC Capital Corporation’s (TSXV:RHC) CEO and grew market cap to CA$9.82M 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. 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. View our latest analysis for RHC Capital

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.
TSXV:RHC Past Future Earnings Jan 24th 18
TSXV:RHC Past Future Earnings Jan 24th 18

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.

Next Steps:

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: