Alan Auerbach took the reins as CEO of Puma Biotechnology Inc’s (NASDAQ:PBYI) and grew market cap to US$1.83b 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 Auerbach’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.
Did Auerbach create value?PBYI 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. Over the last year PBYI released negative earnings of -US$243.43m . But this is an improvement on prior year’s loss of -US$277.90m, which may signal a turnaround since PBYI has been loss-making for the past five years, on average, with an EPS of -US$5.14. Given earnings are moving the right way, CEO pay should represent Auerbach’s hard work. In the same year, Auerbach’s total remuneration increased by 38.28% to US$10.86m. Moreover, Auerbach’s pay is also made up of non-cash items, which means that fluctuations in PBYI’s share price can impact the real level of what the CEO actually receives.
What’s a reasonable CEO compensation?Even though no standard benchmark exists, since compensation should account for specific factors of the company and market, we can determine a high-level thresold to see if PBYI is an outlier. This exercise helps investors ask the right question about Auerbach’s incentive alignment. On average, a US small-cap is worth around $1B, creates earnings of $96M, and pays its CEO circa $2.7M per annum. Typically I’d use market cap and profit as factors determining performance, however, PBYI’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Auerbach’s pay is above other similar companies.
What this means for you:
In order to determine whether or not you should invest in PBYI, your thesis should be built on fundamentals. Even though CEO pay isn’t technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how PBYI makes money, and factors impacting your return on investment. 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 PBYI’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 PBYI? 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.