Matt Levatich took the reins as CEO of Harley-Davidson Inc’s (NYSE:HOG) and grew market cap to US$7.26b recently. 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 Levatich’s pay and compare this to the company’s performance over the same period, as well as measure it against other US CEOs leading companies of similar size and profitability.
What has been the trend in HOG’s earnings?Earnings is a powerful indication of HOG’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Levatich’s performance in the past year. Most recently, HOG produced an earnings of US$493.62m , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of US$603.46m. However, HOG has strived to sustain a strong track record of generating profits, given its average EPS of US$3.30 over the past couple of years. In the situation of diminishing earnings, the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. In any event, CEO compensation should emulate the current condition of the business. In the most recent report, Levatich’s total remuneration increased by 18.89% to US$11.12m. Furthermore, Levatich’s pay is also made up of 64.53% non-cash elements, which means that variabilities in HOG’s share price can impact the real level of what the CEO actually receives.
Is HOG overpaying the CEO?
Though there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can determine a high-level thresold to see if HOG deviates substantially from its peers. This exercise helps investors ask the right question about Levatich’s incentive alignment. Generally, a US mid-cap is worth around $5B, creates earnings of $290M and remunerates its CEO circa $5.3M per year. Taking into account HOG’s size and performance, in terms of market cap and earnings, it seems that Levatich is remunerated above the average US mid-cap CEO. Though this is only a rudimentary estimate, shareholders should be aware of this expense.
What this means for you:
Whether Levatich is over or underpaid should not be a deciding factor whether or not you invest in HOG. 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 HOG is placed financially. 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 HOG’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 HOG? 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 email@example.com.