John Butler is the CEO of Akebia Therapeutics Inc (NASDAQ:AKBA), which has recently grown to a market capitalization of US$565.72m. 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. Today we will assess Butler’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 AKBA’s performance been like?Earnings is a powerful indication of AKBA’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Butler’s performance in the past year. Over the last year AKBA produced negative earnings of -US$55.79m . But this is an improvement on prior year’s loss of -US$154.49m, which may signal a turnaround since AKBA has been loss-making for the past five years, on average, with an EPS of -US$27.98. As profits are moving up and up, CEO pay should mirror Butler’s hard work. Over the same period Butler’s total compensation rose by 28.08% to US$3.41m. Moreover, Butler’s pay is also made up of 75.87% non-cash elements, which means that fluxes in AKBA’s share price can affect the actual level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Though no standard benchmark exists, as compensation should be tailored to the specific company and market, we can estimate a high-level benchmark to see if AKBA is an outlier. This exercise can help direct shareholders to ask the right question about Butler’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, AKBA’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Butler’s pay is above other similar companies.
What this means for you:
AKBA may be paying its CEO above-market rates due to many reasons – retention, reward, or inflated non-cash components of total pay. However, shareholders also should be aware of what the appropriate level is. Boards should be transparent with how they structure CEO pay given that there should be nothing to hide in public companies. Hopefully this analysis has given you the basis for questioning the next CEO pay raise. 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 AKBA’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 AKBA? 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.