Is Petropavlovsk PLC (LON:POG) Overpaying Its CEO?

Leading Petropavlovsk PLC (LSE:POG) as the CEO, Sergey Ermolenko took the company to a valuation of GBP£255.71M. 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. I will break down Ermolenko’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. See our latest analysis for Petropavlovsk

What has been the trend in POG’s earnings?

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. Most recently, POG delivered a profit of $47.8M , moving POG from negative territory of -$153.2M in the prior year to profitability. This could signal a turnaround given that POG has been loss-making for the past five years, on average, with an EPS of -$0.16. Given earnings are moving the right way, CEO pay should mirror Ermolenko’s value creation for shareholders. In the same year, Ermolenko’s total remuneration dropped by more than half of the prior year’s level, to $0. Although I couldn’t find information on the composition of Ermolenko’s pay, if some portion were non-cash items such as stocks and options, then variabilities in POG’s share price can affect the true level of what the CEO actually receives.
LSE:POG Past Future Earnings Dec 13th 17
LSE:POG Past Future Earnings Dec 13th 17

Is POG overpaying the CEO?

Though there is no cookie-cutter approach, since remuneration should be tailored to the specific company and market, we can determine a high-level benchmark to see if POG deviates substantially from its peers. This outcome can help shareholders ask the right question about Ermolenko’s incentive alignment. Normally, a UK small-cap is worth around £696M, generates earnings of £67M, and remunerates its CEO circa £1M per annum. Allowing for the size of POG in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Ermolenko is paid less than other similar UK CEOs in the small-cap industry.

What this means for you:

Are you a shareholder? Hopefully this article has given you insight on how shareholders should think about POG’s governance policies such as CEO pay. As an investor, you have the right to understand how the board thinks about management incentives, and also the right to vote for and against substantial CEO pay changes. Governance is a big factor in investing, and I encourage you to dig deeper into those that represent your voice on the board. To find out more about POG’s governance, look through our infographic report of the company’s board and management.

Are you a potential investor? Whether Ermolenko is over or underpaid should not be a deciding factor whether or not you invest in POG. However, the way the company is governed and policies, such as remuneration, are structured, are important considerations for an investor. The best place to start is to understand how well POG is placed financially. To research more about these fundamentals, I recommend you check out our simple infographic report on POG’s financial metrics.

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