Is Western Forest Products Inc's (TSE:WEF) CEO Salary Justified?

Don Demens is the CEO of Western Forest Products Inc (TSE:WEF), which has recently grown to a market capitalization of CA$987.03m. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. I will break down Demens’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 Western Forest Products

Did Demens create value?

Profitability of a company is a strong indication of WEF's ability to generate returns on shareholders' funds through corporate activities. In this exercise, I will use profits as a proxy for Demens's performance. Over the last year WEF released an earnings of CA$79.90m compared to its prior year’s earnings of CA$93.10m – a decline of -14.18%. However, WEF has strived to sustain a strong track record of generating profits, given its average EPS of CA$0.17 over the past couple of years. In the situation of abating earnings, the company may be going through a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should be reflective of the current condition of the business. In the latest financial report, Demens's total remuneration declined by a minor -0.095%, to CA$2.08m. In addition to this, Demens's pay is also made up of 38.68% non-cash elements, which means that fluxes in WEF's share price can impact the true level of what the CEO actually collects at the end of the year.

Is WEF's CEO overpaid relative to the market?

While there is no cookie-cutter approach, since remuneration should account for specific factors of the company and market, we can gauge a high-level benchmark to see if WEF deviates substantially from its peers. This exercise can help shareholders ask the right question about Demens’s incentive alignment. Generally, a Canadian small-cap has a value of $345M, creates earnings of $24M, and remunerates its CEO at roughly $770,000 per annum. Based on the size of WEF in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Demens is paid above other Canadian CEOs of small-caps, on average. Even though this is merely a basic estimate, investors should be aware of this expense.

What this means for you:

Board members are the voice of shareholders. Although CEO pay doesn't necessarily make a big dent in your investment thesis in WEF, 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 WEF'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 WEF? 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.