Mike O’Donnell is the CEO of Ruth’s Hospitality Group Inc (NASDAQ:RUTH), which has recently grown to a market capitalization of US$895.61m. 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 O’Donnell’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 RUTH’s performance been like?RUTH can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. In the past year, RUTH produced an earnings of US$32.80m , which is an increase of 5.75% from its previous year’s earnings of US$31.01m. This is a positive indication that RUTH has strived to maintain a good track record of profitability in the face of any headwinds. As profits are moving up and up, CEO pay should be reflective of O’Donnell’s value creation for shareholders. During the same period, O’Donnell’s total remuneration fell by -5.27%, to US$2.82m. In addition to this, O’Donnell’s pay is also made up of 54.48% non-cash elements, which means that variabilities in RUTH’s share price can affect the actual level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
Though one size does not fit all, since compensation should account for specific factors of the company and market, we can fashion a high-level benchmark to see if RUTH deviates substantially from its peers. This exercise helps investors ask the right question about O’Donnell’s incentive alignment. On average, a US small-cap is worth around $1B, produces earnings of $96M, and pays its CEO circa $2.7M per year. Taking into account RUTH’s size and performance, in terms of market cap and earnings, it seems that O’Donnell is compensated similar to the average US small-cap CEO This indicates that O’Donnell’s pay is fair.
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 O’Donnell 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. 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 RUTH’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 RUTH? 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 pass 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.