Should You Worry About National American University Holdings Inc’s (NASDAQ:NAUH) CEO Salary Level?

Ronald Shape has been at the helm as CEO of National American University Holdings Inc (NASDAQ:NAUH), which has grown to a market capitalization of $33.20M. 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 Shape’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. See our latest analysis for National American University Holdings

Did Shape create value?

Earnings is a powerful indication of NAUH’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Shape’s performance in the past year. Most recently, NAUH delivered negative earnings of -$8.0M , which is a further decline from prior year’s loss of -$6.1M. Though, NAUH hasn’t always been loss-making, with an average EPS of $0.1 over the past five years. In the situation of negative earnings, the company may be going through a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should be reflective of the current state of the business. From the latest financial report, Shape’s total remuneration fell by a meaningful rate of -28.62%, to $469,163.
NasdaqGM:NAUH Income Statement Dec 28th 17
NasdaqGM:NAUH Income Statement Dec 28th 17

Is NAUH’s CEO overpaid relative to the market?

While there is no cookie-cutter approach, since remuneration should be tailored to the specific company and market, we can fashion a high-level base line to see if NAUH deviates substantially from its peers. This outcome helps investors ask the right question about Shape’s incentive alignment. On average, a US small-cap has a value of $1B, creates earnings of $96M, and remunerates its CEO at roughly $2.7M annually. Normally I would use earnings and market cap to account for variations in performance, however, NAUH’s negative earnings lower the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Shape is remunerated sensibly relative to peers. Putting everything together, even though NAUH is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.

What this means for you:

Are you a shareholder? CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Shape remunerated appropriately based on other factors we have not covered today? 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. To find out more about NAUH’s governance, look through our infographic report of the company’s board and management.

Are you a potential investor? Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in NAUH, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. To research more about these fundamentals, I recommend you check out our simple infographic report on NAUH’s financial metrics.

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