Leading HTG Molecular Diagnostics Inc (NASDAQ:HTGM) as the CEO, Tim, TJ Johnson took the company to a valuation of US$101.72m. 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 Johnson’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.
Did Johnson create value?HTGM 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. Over the last year HTGM produced negative earnings of -US$16.79m . But this is an improvement on prior year’s loss of -US$23.82m, which may signal a turnaround since HTGM has been loss-making for the past five years, on average, with an EPS of -US$55.94. As profits are moving up and up, CEO pay should echo Johnson’s valued-adding activities. During this period Johnson’s total remuneration rose by 38.95% to US$1.04m. Furthermore, Johnson’s pay is also made up of 14.85% non-cash elements, which means that variabilities in HTGM’s share price can move the true level of what the CEO actually receives.
Is HTGM’s CEO overpaid relative to the market?While one size does not fit all, as compensation should be tailored to the specific company and market, we can gauge a high-level thresold to see if HTGM deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Johnson’s incentive alignment. On average, a US small-cap is worth around $1B, creates earnings of $96M, and remunerates its CEO at roughly $2.7M per annum. Typically I would use earnings and market cap to account for variations in performance, however, HTGM’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Johnson is remunerated sensibly relative to peers. Putting everything together, although HTGM is loss-making, it seems like the CEO’s pay is appropriate.
In order to determine whether or not you should invest in HTGM, 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 HTGM 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:
- Governance: To find out more about HTGM’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 HTGM? 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.