Wayne Smith is the CEO of Community Health Systems Inc (NYSE:CYH), which has recently grown to a market capitalization of US$476.09m. 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 Smith’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. Check out our latest analysis for Community Health Systems
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What has been the trend in CYH's earnings?
Profitability of a company is a strong indication of CYH's ability to generate returns on shareholders' funds through corporate activities. In this exercise, I will use profits as a proxy for Smith's performance. Recently, CYH produced negative earnings of -US$2.27b , which is a further decline from prior year's loss of -US$1.92b. Furthermore, on average, CYH has been loss-making in the past, with a 5-year average EPS of -US$2.43. During times of negative earnings, the company may be facing a period of reinvestment and growth, or it can be a signal of some headwind. Regardless, CEO compensation should mirror the current state of the business. In the latest financial report, Smith's total remuneration fell by more than half of the prior year's level, to US$4.95m. Moreover, Smith's pay is also made up of 3.42% non-cash elements, which means that fluxes in CYH's share price can impact the true level of what the CEO actually takes home at the end of the day. NYSE:CYH Income Statement July 2nd 18
Is CYH overpaying the CEO?
Despite the fact that no standard benchmark exists, as compensation should account for specific factors of the company and market, we can fashion a high-level yardstick to see if CYH is an outlier. This exercise helps investors ask the right question about Smith’s incentive alignment. Typically, a US small-cap is worth around $1B, produces earnings of $96M, and pays its CEO at roughly $2.7M annually. Normally I would use earnings and market cap to account for variations in performance, however, CYH's negative earnings lower the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Smith's pay is above other similar companies.
What this means for you:
My analysis shows that Smith may be paid above the appropriate level, based on the size of CYH and its recent year's earnings performance. The question to answer now is whether this level of pay is justified. There are most likely other factors I have not account for, but in any case, this outcome should provide a basis for you as shareholders, to question the board's decision to increase CEO pay in the future. If you have not done so already, I urge you to complete your research by taking a look at the following:
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
About NYSE:CYH
Community Health Systems
Owns, leases, and operates general acute care hospitals in the United States.
