Yuichi Iwaki took the reins as CEO of MediciNova Inc’s (NASDAQ:MNOV) and grew market cap to US$391.99m recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Iwaki’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 MNOV’s earnings?Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Recently, MNOV delivered negative earnings of -US$13.05m , which is a further decline from prior year’s loss of -US$10.09m. Additionally, on average, MNOV has been loss-making in the past, with a 5-year average EPS of -US$0.48. During times of negative earnings, the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any event, CEO compensation should mirror the current state of the business. From the latest financial statments, Iwaki’s total remuneration grew by 32.07% to US$2.56m. In addition to this, Iwaki’s pay is also made up of 68.07% non-cash elements, which means that variabilities in MNOV’s share price can move the true level of what the CEO actually collects at the end of the year.
Is MNOV overpaying the CEO?While there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can fashion a high-level yardstick to see if MNOV is an outlier. This exercise can help direct shareholders to ask the right question about Iwaki’s incentive alignment. Typically, a US small-cap has a value of $1B, creates earnings of $96M, and pays its CEO at roughly $2.7M annually. Typically I would look at market cap and earnings as a proxy for performance, however, MNOV’s negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Iwaki is remunerated sensibly relative to peers. Overall, though MNOV is loss-making, it seems like the CEO’s pay is appropriate.
You can breathe easy knowing that shareholder funds aren’t being used to overpay MNOV’s CEO. However, on the flipside, you should ask whether Iwaki is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. 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 MNOV’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 MNOV? 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.