Does ENDRA Life Sciences Inc’s (NASDAQ:NDRA) CEO Pay Reflect Performance?

Francois Michelon took the reins as CEO of ENDRA Life Sciences Inc’s (NASDAQ:NDRA) and grew market cap to $12.50M recently. 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 Michelon’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. See our latest analysis for ENDRA Life Sciences

What has NDRA’s performance been like?

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, NDRA delivered negative earnings of -$3.8M , which is a further decline from prior year’s loss of -$2.5M. Moreover, on average, NDRA has been loss-making in the past, with a 5-year average EPS of -$3.48. In the situation of unprofitability the company may be facing a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should mirror the current condition of the business. In the most recent report, Michelon’s total remuneration fell by a significant rate of -38.32%, to $262,152.
NasdaqCM:NDRA Income Statement Jan 31st 18
NasdaqCM:NDRA Income Statement Jan 31st 18

What’s a reasonable CEO compensation?

While no standard benchmark exists, since compensation should be tailored to the specific company and market, we can estimate a high-level yardstick to see if NDRA deviates substantially from its peers. This exercise helps investors ask the right question about Michelon’s incentive alignment. Generally, a US small-cap has a value of $1B, creates earnings of $96M, and pays its CEO circa $2.7M annually. Typically I’d use market cap and profit as factors determining performance, however, NDRA’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Michelon is being paid within the bounds of reasonableness. Putting everything together, though NDRA is unprofitable, it seems like the CEO’s pay is reflective of the appropriate 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 Michelon 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: