Did Mahaffy create value?Profitability of a company is a strong indication of CLVS’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Mahaffy’s performance. Most recently, CLVS produced negative earnings of -US$346.40M . But this is an improvement on prior year’s loss of -US$349.14M, which may signal a turnaround since CLVS has been loss-making for the past five years, on average, with an EPS of -US$9.25. Since earnings are heading towards the right direction, CEO pay should represent Mahaffy’s valued-adding activities. Over the same period Mahaffy’s total compensation more than doubled, to US$8.73M . Moreover, Mahaffy’s pay is also made up of 5.15% non-cash elements, which means that fluctuations in CLVS’s share price can affect the true level of what the CEO actually collects at the end of the year.
Is CLVS’s CEO overpaid relative to the market?
Even though one size does not fit all, since remuneration should account for specific factors of the company and market, we can gauge a high-level yardstick to see if CLVS deviates substantially from its peers. This exercise can help shareholders ask the right question about Mahaffy’s incentive alignment. Normally, a US mid-cap has a value of $5B, produces earnings of $290M and pays its CEO circa $5.3M per annum. Usually I would use earnings and market cap to account for variations in performance, however, CLVS’s negative earnings lower the effectiveness of this method. Looking at the range of compensation for mid-cap executives, it seems like Mahaffy’s pay exceeds its peer group.
What this means for you:
In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose another executive pay raise. Although this analysis is relatively simplified, the fact that Mahaffy’s pay is above its peer group should raise questions as to why this may be the case. 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 CLVS’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 CLVS? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!