David Stover is the CEO of Noble Energy Inc (NYSE:NBL), which has recently grown to a market capitalization of US$16.78b. 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 Stover’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 been the trend in NBL’s earnings?Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Over the last year NBL delivered negative earnings of -US$600.00m . But this is an improvement on prior year’s loss of -US$675.00m, which may signal a turnaround since NBL has been loss-making for the past five years, on average, with an EPS of -US$0.17. Given earnings are moving the right way, CEO pay should echo Stover’s value creation for shareholders. Over the same period Stover’s total remuneration rose by 11.09% to US$11.26m. Furthermore, Stover’s pay is also made up of 74.76% non-cash elements, which means that variabilities in NBL’s share price can move the real level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
While one size does not fit all, since remuneration should account for specific factors of the company and market, we can estimate a high-level base line to see if NBL is an outlier. This exercise helps investors ask the right question about Stover’s incentive alignment. Generally, a US large-cap is worth around $64.9B, creates earnings of $3.6B and pays its CEO circa $12.2M annually. Typically I would look at market cap and earnings as a proxy for performance, however, NBL’s negative earnings reduces the effectiveness of this method. Analyzing the range of remuneration for large-cap executives, it seems like Stover is being paid within the bounds of reasonableness. Putting everything together, though NBL is unprofitable, it seems like the CEO’s pay is sound.
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 Stover 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 NBL’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 NBL? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!