Paul Black took the reins as CEO of Allscripts Healthcare Solutions Inc’s (NASDAQ:MDRX) and grew market cap to US$2.22b recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. Today we will assess Black’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 Black create value?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. In the past year, MDRX delivered negative earnings of -US$225.44m , which is a further decline from prior year’s loss of -US$47.68m. Furthermore, on average, MDRX has been loss-making in the past, with a 5-year average EPS of -US$0.29. During times of negative earnings, the company may be facing a period of reinvestment and growth, or it can be a sign of some headwind. In any event, CEO compensation should echo the current condition of the business. In the latest financial report, Black’s total remuneration rose by 17.01% to US$7.72m. Moreover, Black’s pay is also made up of 68.72% non-cash elements, which means that variabilities in MDRX’s share price can affect the true level of what the CEO actually takes home at the end of the day.
Is MDRX’s CEO overpaid relative to the market?
Despite the fact that no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can evaluate a high-level yardstick to see if MDRX deviates substantially from its peers. This exercise can help shareholders ask the right question about Black’s incentive alignment. Typically, a US mid-cap is worth around $5B, generates earnings of $290M and remunerates its CEO circa $5.3M per year. Typically I’d use market cap and profit as factors determining performance, however, MDRX’s negative earnings lower the effectiveness of this method. Given the range of pay for mid-cap executives, it seems like Black’s pay outstrips those in comparable companies.
What this means for you:
Whether Black is over or underpaid should not be a deciding factor whether or not you invest in MDRX. However, the way the company is governed and policies, such as remuneration, are structured, are important considerations for an investor. The best place to start is to understand how well MDRX is placed financially. 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 MDRX’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 MDRX? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!