How Should Investors React To Great Lakes Graphite Inc’s (CVE:GLK) CEO Pay?

Paul Gorman is the CEO of Great Lakes Graphite Inc (TSXV:GLK), which has recently grown to a market capitalization of CA$5.65M. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Gorman’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 Great Lakes Graphite

What has been the trend in GLK’s earnings?

Profitability of a company is a strong indication of GLK’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Gorman’s performance. Most recently, GLK delivered negative earnings of -CA$7.14M , which is a further decline from prior year’s loss of -CA$2.36M. Furthermore, on average, GLK has been loss-making in the past, with a 5-year average EPS of -CA$0.024. During times of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should emulate the current condition of the business. From the latest financial report, Gorman’s total compensation rose by 17.65% to CA$141.25K.
TSXV:GLK Income Statement Apr 27th 18
TSXV:GLK Income Statement Apr 27th 18

What’s a reasonable CEO compensation?

Even though no standard benchmark exists, as compensation should account for specific factors of the company and market, we can gauge a high-level base line to see if GLK deviates substantially from its peers. This exercise can help shareholders ask the right question about Gorman’s incentive alignment. Normally, a Canadian small-cap has a value of $345M, generates earnings of $24M, and pays its CEO at roughly $770,000 per year. Typically I’d use market cap and profit as factors determining performance, however, GLK’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Gorman is paid aptly compared to those in similar-sized companies. Putting everything together, although GLK is unprofitable, it seems like the CEO’s pay is appropriate.

Next Steps:

You can breathe easy knowing that shareholder funds aren’t being used to overpay GLK’s CEO. However, on the flipside, you should ask whether Gorman is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. 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 GLK’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 GLK? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!