Should You Worry About Vianet Group plc’s (LON:VNET) CEO Pay Check?

Stewart Darling is the CEO of Vianet Group plc (AIM:VNET), which has recently grown to a market capitalization of £37.54M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Darling’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. Check out our latest analysis for Vianet Group

What has VNET’s performance been like?

Profitability of a company is a strong indication of VNET’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Darling’s performance. Most recently, VNET delivered an earnings of £0.8M , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of £1.4M. However, VNET has strived to maintain a good track record of profitability, given its average EPS of £0.07 over the past couple of years. During times of abating earnings, the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should be reflective of the current state of the business. In the latest financial report, Darling’s total compensation rose by a mere 3.65% to £341,000. Although I couldn’t find information on the breakdown of Darling’s pay, if some portion were non-cash items such as stocks and options, then variabilities in VNET’s share price can move the true level of what the CEO actually takes home at the end of the day.
AIM:VNET Income Statement Jan 13th 18
AIM:VNET Income Statement Jan 13th 18

What’s a reasonable CEO compensation?

Even though one size does not fit all, since compensation should be tailored to the specific company and market, we can determine a high-level yardstick to see if VNET deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about Darling’s incentive alignment. On average, a UK small-cap is worth around £696M, generates earnings of £67M, and pays its CEO circa £1M annually. Based on VNET’s size and performance, in terms of market cap and earnings, it appears that Darling is compensated similar to other UK CEOs of small-caps, on average. This indicates that Darling’s pay is fair.

What this means for you:

Are you a shareholder? In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose an executive pay raise. Will this raise take Darling’s pay beyond the bound of reasonableness, or will it help in retaining the talented executive? Being proactive in governance decisions is a key part to investing, and collectively, investors can make a big difference. To find out more about VNET’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 Darling’s incentives are well-aligned with VNET’s shareholders, it is certainly not sufficient to base your investment decision solely on this factor. Whether the company is fundamentally strong depends on VNET’s financial health and its future outlook. To research more about these fundamentals, I recommend you check out our simple infographic report on VNET’s financial metrics.

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