Is Kaizen Discovery Inc’s (CVE:KZD) CEO Paid Enough To Stay Motivated?

Tom Peregoodoff took the helm as Kaizen Discovery Inc’s (TSXV:KZD) CEO and grew market cap to CA$29.06M recently. 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. I will break down Peregoodoff’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. Check out our latest analysis for Kaizen Discovery

What has KZD’s performance been like?

Profitability of a company is a strong indication of KZD’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Peregoodoff’s performance. In the past year, KZD delivered negative earnings of -CA$7.3M . However, this is an improvement on prior year’s loss of -CA$12.9M, which may signal a turnaround since KZD has been loss-making for the past five years, on average, with an EPS of -CA$0.06. Since earnings are heading towards the right direction, CEO pay should be reflective of Peregoodoff’s value creation for shareholders. In the same year, Peregoodoff’s total compensation fell by -6.54%, to CA$0. In addition to this, Peregoodoff’s pay is also made up of non-cash items, which means that fluctuations in KZD’s share price can affect the real level of what the CEO actually collects at the end of the year.
TSXV:KZD Past Future Earnings Jan 4th 18
TSXV:KZD Past Future Earnings Jan 4th 18

Is KZD overpaying the CEO?

Despite the fact that one size does not fit all, as remuneration should account for specific factors of the company and market, we can fashion a high-level benchmark to see if KZD deviates substantially from its peers. This outcome helps investors ask the right question about Peregoodoff’s incentive alignment. Normally, a Canadian small-cap is worth around $345M, generates earnings of $24M, and pays its CEO at roughly $770,000 per annum. Usually I would look at market cap and earnings as a proxy for performance, however, KZD’s negative earnings reduces the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Peregoodoff is remunerated sensibly relative to peers. Putting everything together, even though KZD is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.

What this means for you:

Are you a shareholder? CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Peregoodoff remunerated appropriately based on other factors we have not covered today? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. To find out more about KZD’s governance, look through our infographic report of the company’s board and management.

Are you a potential investor? Although remuneration can be a useful gauge of whether Peregoodoff’s incentives are well-aligned with KZD’s shareholders, it is certainly not sufficient to base your investment decision solely on this factor. Whether the company is fundamentally strong depends on KZD’s financial health and its future outlook. To research more about these fundamentals, I recommend you check out our simple infographic report on KZD’s financial metrics.

PS. If you are not interested in Kaizen Discovery anymore, you can use our free platform to see my list of over 50 sustainable companies producing great returns.