Leading Universal Technical Institute Inc (NYSE:UTI) as the CEO, Kim McWaters took the company to a valuation of US$70.02m. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 McWaters’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 UTI’s performance been like?Earnings is a powerful indication of UTI’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of McWaters’s performance in the past year. Recently, UTI produced negative earnings of -US$27.69m , which is a further decline from prior year’s loss of -US$21.57m. Moreover, on average, UTI has been loss-making in the past, with a 5-year average EPS of -US$0.31. 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. Regardless, CEO compensation should mirror the current state of the business. In the most recent financial statments, McWaters’s total remuneration increased by a mere 0.008% to US$1.16m. In addition to this, McWaters’s pay is also made up of 7.75% non-cash elements, which means that variabilities in UTI’s share price can impact the true level of what the CEO actually takes home at the end of the day.
Is UTI’s CEO overpaid relative to the market?Even though no standard benchmark exists, since compensation should account for specific factors of the company and market, we can evaluate a high-level base line to see if UTI deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about McWaters’s incentive alignment. On average, a US small-cap has a value of $1B, produces earnings of $96M, and pays its CEO at roughly $2.7M per annum. Usually I’d use market cap and profit as factors determining performance, however, UTI’s negative earnings reduces the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like McWaters is remunerated sensibly relative to peers. Overall, even though UTI is unprofitable, it seems like the CEO’s pay is fair.
My conclusion is that McWaters 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 UTI’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 UTI? 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.