Leading Citigroup Inc (NYSE:C) as the CEO, Mike Corbat took the company to a valuation of US$174.05b. 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 Corbat’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 C’s performance been like?Profitability of a company is a strong indication of C’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Corbat’s performance. Over the last year C produced negative earnings of -US$6.75b , compared to the previous year’s positive earnings. Furthermore, C hasn’t always been loss-making, with an average EPS of US$3.16 over the past five years. In the situation of unprofitability the company may be facing a period of reinvestment and growth, or it can be a signal of some headwind. In any event, CEO compensation should be reflective of the current state of the business. From the latest financial statments, Corbat’s total compensation rose by 33.03% to US$17.80m. In addition to this, Corbat’s pay is also made up of 55.25% non-cash elements, which means that fluctuations in C’s share price can impact the true level of what the CEO actually receives.
What’s a reasonable CEO compensation?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 thresold to see if C is an outlier. This exercise can help shareholders ask the right question about Corbat’s incentive alignment. On average, a US large-cap is worth around $64.9B, produces earnings of $3.6B and pays its CEO at roughly $12.2M annually. Normally I’d use market cap and profit as factors determining performance, however, C’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for large-cap executives, it seems like Corbat’s pay exceeds its peer group.
What this means for you:
Whether Corbat is over or underpaid should not be a deciding factor whether or not you invest in C. 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 C is placed financially. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Governance: To find out more about C’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 C? 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.