Is Apollo Commercial Real Estate Finance Inc’s (NYSE:ARI) CEO Incentives Align With Yours?

Stuart Rothstein took the helm as Apollo Commercial Real Estate Finance Inc’s (NYSE:ARI) CEO and grew market cap to US$2.32b 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 Rothstein’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.

View our latest analysis for Apollo Commercial Real Estate Finance

What has been the trend in ARI’s earnings?

Earnings is a powerful indication of ARI’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Rothstein’s performance in the past year. Recently, ARI delivered an earnings of US$158.02m , which is an increase of 5.12% from its last year’s earnings of US$150.33m. This is a positive indication that ARI 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 Rothstein’s hard work. Over the same period Rothstein’s total remuneration grew by 11.63% to US$2.14m. Furthermore, Rothstein’s pay is also comprised of non-cash elements, which means that variabilities in ARI’s share price can impact the actual level of what the CEO actually receives.
NYSE:ARI Past Future Earnings July 25th 18
NYSE:ARI Past Future Earnings July 25th 18

What’s a reasonable CEO compensation?

Even though one size does not fit all, since remuneration should be tailored to the specific company and market, we can evaluate a high-level thresold to see if ARI deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Rothstein’s incentive alignment. Normally, a US mid-cap is worth around $5B, creates earnings of $290M and pays its CEO circa $5.3M per year. Allowing for ARI’s size and performance, in terms of market cap and earnings, it seems that Rothstein is paid in-line with other comparable US CEOs of profitable mid-caps. This could mean Rothstein is paid a suitable level.

Next Steps:

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 Rothstein 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 highly recommend you to complete your research by taking a look at the following:

  1. Governance: To find out more about ARI’s governance, look through our infographic report of the company’s board and management.
  2. 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.
  3. Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of ARI? 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 editorial-team@simplywallst.com.