Mike Mussallem took the reins as CEO of Edwards Lifesciences Corporation’s (NYSE:EW) and grew market cap to US$32.68b 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. I will break down Mussallem’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 Mussallem create value?Earnings is a powerful indication of EW’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Mussallem’s performance in the past year. Most recently, EW released an earnings of US$656.60m compared to its prior year’s earnings of US$716.20m – a decline of -8.32%. However, EW has strived to sustain a strong track record of generating profits, given its average EPS of US$2.32 over the past couple of years. In the situation of fall in profits, the company may be going through a period of reinvestment and growth, or it can be an indication of some headwind. Regardless, CEO compensation should be reflective of the current state of the business. In the latest financial statments, Mussallem’s total remuneration rose by 10.93% to US$10.80m. Furthermore, Mussallem’s pay is also made up of 65.03% non-cash elements, which means that fluxes in EW’s share price can impact the real level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
While no standard benchmark exists, as remuneration should account for specific factors of the company and market, we can fashion a high-level yardstick to see if EW deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about Mussallem’s incentive alignment. Generally, a US large-cap has a value of $64.9B, generates earnings of $3.6B and pays its CEO circa $12.2M annually. Considering the size of EW in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Mussallem is paid on a similar level to the average US large-cap CEO This could mean Mussallem is paid a suitable level.
My conclusion is that Mussallem is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about EW’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 EW? 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 email@example.com.