Should You Worry About E Lighting Group Holdings Limited’s (HKG:8222) CEO Pay?

Raymond Hui took the helm as E Lighting Group Holdings Limited’s (SEHK:8222) CEO and grew market cap to HK$76.68M 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 Hui’s pay and compare this to the company’s performance over the same period, as well as measure it against other SEHK-listed CEOs leading companies of similar size and profitability. Check out our latest analysis for E Lighting Group Holdings

What has been the trend in 8222’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. In the past year, 8222 released negative earnings of -HK$11.64M . However, this is an improvement on prior year’s loss of -HK$14.56M, which may signal a turnaround since 8222 has been loss-making for the past five years, on average, with an EPS of -HK$0.0091. Given earnings are moving the right way, CEO pay should represent Hui’s valued-adding activities. Over the same period Hui’s total remuneration dropped by a marginal -0.37%, to HK$1.33M. Although I couldn’t find information on the breakdown of Hui’s pay, if some portion were non-cash items such as stocks and options, then variabilities in 8222’s share price can affect the true level of what the CEO actually collects at the end of the year.
SEHK:8222 Past Future Earnings Jun 8th 18
SEHK:8222 Past Future Earnings Jun 8th 18

Is 8222 overpaying the CEO?

Even though there is no cookie-cutter approach, as remuneration should account for specific factors of the company and market, we can estimate a high-level yardstick to see if 8222 is an outlier. This outcome helps investors ask the right question about Hui’s incentive alignment. Generally, a SEHK small-cap is worth around HK$2.61B, creates earnings of HK$245M, and pays its CEO circa HK$3.3M per year. Typically I’d use market cap and profit as factors determining performance, however, 8222’s negative earnings reduces the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Hui is being paid within the bounds of reasonableness. Putting everything together, although 8222 is unprofitable, it seems like the CEO’s pay is sound.

Next Steps:

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 Hui’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. 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 8222’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 8222? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!