Dan O’Brien took the reins as CEO of Flexible Solutions International Inc’s (NYSEMKT:FSI) and grew market cap to US$18.03m recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 O’Brien’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 FSI’s earnings?Earnings is a powerful indication of FSI’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of O’Brien’s performance in the past year. In the past year, FSI produced negative earnings of -US$794.26k , compared to the previous year’s positive earnings. Furthermore, FSI hasn’t always been loss-making, with an average EPS of US$0.086 over the past five years. In the situation of negative earnings, the company may be going through a period of reinvestment and growth, or it can be a signal of some headwind. In any case, CEO compensation should be reflective of the current condition of the business. In the most recent report, O’Brien’s total compensation increased by 21.34% to US$901.61k.
Is FSI’s CEO overpaid relative to the market?While there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can gauge a high-level thresold to see if FSI is an outlier. This outcome can help direct shareholders to ask the right question about O’Brien’s incentive alignment. Typically, a US small-cap is worth around $1B, creates 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, FSI’s negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like O’Brien is remunerated sensibly relative to peers. Putting everything together, even though FSI is unprofitable, it seems like the CEO’s pay is sound.
My conclusion is that O’Brien 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 FSI’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 FSI? 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.