Clive Fenton took the reins as CEO of McCarthy & Stone plc's (LON:MCS) and grew market cap to UK£558.82m recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Fenton’s pay and compare this to the company’s performance over the same period, as well as measure it against other UK CEOs leading companies of similar size and profitability.
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Did Fenton create value?
Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. In the past year, MCS delivered an earnings of UK£64.50m compared to its prior year’s earnings of UK£69.10m – a decline of -6.66%. However, MCS has strived to maintain a good track record of profitability, given its average EPS of UK£0.13 over the past couple of years. During times of deteriorating profitability, the company may be facing a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should represent the current condition of the business. In the latest financial report, Fenton's total remuneration declined by a minor -1.03%, to UK£628.02k.What's a reasonable CEO compensation?
Though one size does not fit all, as compensation should account for specific factors of the company and market, we can evaluate a high-level benchmark to see if MCS is an outlier. This exercise can help shareholders ask the right question about Fenton’s incentive alignment. Normally, a UK small-cap is worth around £696M, generates earnings of £67M, and pays its CEO circa £1M per annum. Taking into account the size of MCS in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Fenton is being paid well below the average UK small-cap CEO.
Next Steps:
In order to determine whether or not you should invest in MCS, your thesis should be built on fundamentals. Even though CEO pay isn't technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how MCS makes money, and factors impacting your return on investment. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about MCS's governance, look through our infographic report of the company's board and management.
- 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.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of MCS? 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 pass 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.