How Should Investors React To XpresSpa Group Inc’s (NASDAQ:XSPA) CEO Pay?

Andrew Perlman took the helm as XpresSpa Group Inc’s (NASDAQ:XSPA) CEO and grew market cap to US$24.95M recently. 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. Today we will assess Perlman’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 XpresSpa Group

What has been the trend in XSPA’s earnings?

Profitability of a company is a strong indication of XSPA’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Perlman’s performance. Over the last year XSPA produced negative earnings of -US$21.99M , which is a further decline from prior year’s loss of -US$1.63M. Moreover, on average, XSPA has been loss-making in the past, with a 5-year average EPS of -US$4.68. During times of negative earnings, the company may be facing a period of reinvestment and growth, or it can be an indication of some headwind. In any case, CEO compensation should mirror the current state of the business. In the latest financial report, Perlman’s total remuneration increased over two-fold, reaching US$1.67M . In addition to this, Perlman’s pay is also made up of 9.38% non-cash elements, which means that fluctuations in XSPA’s share price can affect the real level of what the CEO actually collects at the end of the year.
NasdaqCM:XSPA Income Statement Feb 13th 18
NasdaqCM:XSPA Income Statement Feb 13th 18

What’s a reasonable CEO compensation?

While one size does not fit all, as remuneration should account for specific factors of the company and market, we can determine a high-level benchmark to see if XSPA deviates substantially from its peers. This outcome can help shareholders ask the right question about Perlman’s incentive alignment. Typically, a US small-cap is worth around $1B, produces earnings of $96M, and pays its CEO circa $2.7M per year. Typically I’d use market cap and profit as factors determining performance, however, XSPA’s negative earnings lower the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Perlman is paid aptly compared to those in similar-sized companies. Overall, even though XSPA is loss-making, it seems like the CEO’s pay is fair.

Next Steps:

In order to determine whether or not you should invest in XSPA, your thesis should be built on fundamentals. Even though CEO pay isn’t technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how XSPA makes money, and factors impacting your return on investment. If you have not done so already, I urge you to complete your research by taking a look at the following: