Fran Malecha took the reins as CEO of Compass Minerals International Inc’s (NYSE:CMP) and grew market cap to US$2.32b recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Malecha’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.
What has been the trend in CMP’s earnings?CMP 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. Recently, CMP produced an earnings of US$33.30m , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of US$133.80m. However, CMP has strived to sustain a strong track record of generating profits, given its average EPS of US$4.09 over the past couple of years. During times of fall in profits, the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should mirror the current state of the business. In the latest financial report, Malecha’s total compensation grew by 10.51% to US$3.52m. In addition to this, Malecha’s pay is also made up of 57.98% non-cash elements, which means that variabilities in CMP’s share price can impact the true level of what the CEO actually collects at the end of the year.
Is CMP overpaying the CEO?
While one size does not fit all, since remuneration should be tailored to the specific company and market, we can estimate a high-level benchmark to see if CMP deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Malecha’s incentive alignment. Normally, a US mid-cap is worth around $5B, generates earnings of $290M and pays its CEO circa $5.3M annually. Based on CMP’s size and performance, in terms of market cap and earnings, it appears that Malecha is paid on a similar level to the average US mid-cap CEO This could mean Malecha is paid a suitable level.
My conclusion is that Malecha 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 urge you to complete your research by taking a look at the following:
- Governance: To find out more about CMP’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 CMP? 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.