Leading Wockhardt Limited (NSE:WOCKPHARMA) as the CEO, Murtaza Khorakiwala took the company to a valuation of ₹71.30b. 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 Khorakiwala’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.
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Did Khorakiwala create value?
Profitability of a company is a strong indication of WOCKPHARMA's ability to generate returns on shareholders' funds through corporate activities. In this exercise, I will use profits as a proxy for Khorakiwala's performance. Most recently, WOCKPHARMA delivered negative earnings of -₹2.85b . But this is an improvement on prior year’s loss of -₹6.21b, though WOCKPHARMA hasn’t always been loss-making, given its average EPS of ₹36.97 over the past five years. As profits are moving up and up, CEO pay should mirror Khorakiwala's value creation for shareholders. In the same year, Khorakiwala's total compensation fell by a marginal -0.60%, to ₹13.20m. Although I couldn't find information on the breakdown of Khorakiwala's pay, if some portion were non-cash items such as stocks and options, then fluxes in WOCKPHARMA's share price can affect the actual level of what the CEO actually takes home at the end of the day.Is WOCKPHARMA's CEO overpaid relative to the market?
While there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can fashion a high-level benchmark to see if WOCKPHARMA deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about Khorakiwala’s incentive alignment. On average, a BSE or NSEI small-cap has a value of ₹9.88b, generates earnings of ₹430m, and remunerates its CEO circa ₹7.3m annually. Usually I would look at market cap and earnings as a proxy for performance, however, WOCKPHARMA's negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Khorakiwala's pay outstrips those in comparable companies.What this means for you:
The next CEO pay bump should be questioned by shareholders at AGM voting. Given that Khorakiwala's pay is already above the bracket of other CEOs of similar companies, what justifies a further increase? Although CEO pay is not the be all and end all, it serves as a signal as to whether the board's and management's incentives are aligned with the rest of the shareholders. 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 WOCKPHARMA'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 WOCKPHARMA? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
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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.