Bob Pagano is the CEO of Watts Water Technologies Inc (NYSE:WTS), which has recently grown to a market capitalization of US$2.86b. 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 Pagano’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.
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What has WTS's performance been like?
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. Recently, WTS released a profit of US$79.60m compared to its prior year’s earnings of US$89.64m – a decline of -11.20%. However, WTS has strived to sustain a strong track record of generating profits, given its average EPS of US$1.20 over the past couple of years. During times of falling profits, the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should echo the current condition of the business. From the latest financial statments, Pagano's total compensation grew by 9.87% to US$4.80m. Furthermore, Pagano's pay is also made up of 55.98% non-cash elements, which means that variabilities in WTS's share price can impact the actual level of what the CEO actually takes home at the end of the day.Is WTS overpaying the CEO?
Despite the fact that no standard benchmark exists, since compensation should account for specific factors of the company and market, we can estimate a high-level benchmark to see if WTS is an outlier. This exercise helps investors ask the right question about Pagano’s incentive alignment. Typically, a US mid-cap has a value of $5B, generates earnings of $290M and pays its CEO at roughly $5.3M annually. Based on WTS's size and performance, in terms of market cap and earnings, it seems that Pagano is paid on a similar level to other US CEOs of mid-caps, on average. This indicates that Pagano’s pay is fair.
Next Steps:
My conclusion is that Pagano is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO's incentive alignment with shareholders and how they balance this with retention and reward. 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 WTS'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 WTS? 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.