V. Vaidyanathan took the reins as CEO of Capital First Limited’s (NSE:CAPF) and grew market cap to ₹57.44b 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. Today we will assess Vaidyanathan’s pay and compare this to the company’s performance over the same period, as well as measure it against other Indian CEOs leading companies of similar size and profitability.
What has CAPF’s performance been like?Profitability of a company is a strong indication of CAPF’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Vaidyanathan’s performance. Over the last year CAPF delivered an earnings of ₹3.64b , which is an increase of 41.40% from its previous year’s earnings of ₹2.58b. This is an encouraging signal that CAPF aims to sustain a strong track record of generating profits regardless of the challenges. Given earnings are moving the right way, CEO pay should be reflective of Vaidyanathan’s value creation for shareholders. Over the same period Vaidyanathan’s total remuneration grew by a mere 3.93% to ₹74.01m. Although I couldn’t find information on the composition of Vaidyanathan’s pay, if some portion were non-cash items such as stocks and options, then fluxes in CAPF’s share price can affect the actual level of what the CEO actually receives.
Is CAPF overpaying the CEO?Even though there is no cookie-cutter approach, as remuneration should be tailored to the specific company and market, we can determine a high-level yardstick to see if CAPF is an outlier. This exercise helps investors ask the right question about Vaidyanathan’s incentive alignment. Generally, a BSE or NSEI small-cap has a value of ₹9.88b, creates earnings of ₹430m, and pays its CEO circa ₹7.3m per annum. Allowing for CAPF’s size and performance, in terms of market cap and earnings, it appears that Vaidyanathan is remunerated above other BSE and NSEI CEOs of profitable small-caps. Even though this is merely a basic calculation, shareholders should be cognizant of this expense.
What this means for you:
CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Why is Vaidyanathan remuneration above that of similar companies? 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. 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 CAPF’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 CAPF? 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 past 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 firstname.lastname@example.org.