John Milligan took the reins as CEO of Gilead Sciences Inc’s (NASDAQ:GILD) and grew market cap to US$101.61b 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. Today we will assess Milligan’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 GILD’s earnings?GILD 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. Most recently, GILD produced a profit of US$2.21b , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of US$12.21b. However, GILD has strived to sustain a strong track record of generating profits, given its average EPS of US$5.85 over the past couple of years. During times of declining earnings, the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should emulate the current state of the business. From the latest financial report, Milligan’s total compensation rose by 10.79% to US$15.44m. Moreover, Milligan’s pay is also made up of 0.39% non-cash elements, which means that variabilities in GILD’s share price can move the true level of what the CEO actually takes home at the end of the day.
Is GILD’s CEO overpaid relative to the market?Despite the fact that no standard benchmark exists, since remuneration should account for specific factors of the company and market, we can fashion a high-level thresold to see if GILD is an outlier. This outcome can help direct shareholders to ask the right question about Milligan’s incentive alignment. Generally, a US large-cap is worth around $64.9B, produces earnings of $3.6B and remunerates its CEO circa $12.2M per year. Allowing for GILD’s size and performance, in terms of market cap and earnings, it seems that Milligan is compensated more than other US CEOs of profitable large-caps. Even though this is merely a rudimentary calculation, investors should be cognizant of this expense.
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 Milligan’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 urge you to complete your research by taking a look at the following:
- Governance: To find out more about GILD’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 GILD? 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.