Is Redfin Corporation’s (NASDAQ:RDFN) CEO Incentives Align With Yours?

Glenn Kelman took the helm as Redfin Corporation’s (NASDAQ:RDFN) CEO and grew market cap to US$2.18b recently. 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 Kelman’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.

Check out our latest analysis for Redfin

Did Kelman create value?

Earnings is a powerful indication of RDFN’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Kelman’s performance in the past year. In the past year, RDFN released negative earnings of -US$174.52m , which is a further decline from prior year’s loss of -US$124.78m. Furthermore, on average, RDFN has been loss-making in the past, with a 5-year average EPS of -US$8.80. During times of unprofitability the company may be going through a period of reinvestment and growth, or it can be a signal of some headwind. Regardless, CEO compensation should be reflective of the current state of the business. From the latest report, Kelman’s total remuneration declined by -19.68%, to US$256.34k. In addition to this, Kelman’s pay is also made up of 2.47% non-cash elements, which means that variabilities in RDFN’s share price can impact the true level of what the CEO actually receives.
NasdaqGS:RDFN Income Statement Export July 27th 18
NasdaqGS:RDFN Income Statement Export July 27th 18

Is RDFN overpaying the CEO?

Despite the fact that there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can estimate a high-level base line to see if RDFN is an outlier. This exercise can help direct shareholders to ask the right question about Kelman’s incentive alignment. Typically, a US mid-cap has a value of $5B, generates earnings of $290M and pays its CEO at roughly $5.3M per annum. Typically I would use earnings and market cap to account for variations in performance, however, RDFN’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for mid-cap executives, it seems like Kelman is being paid within the bounds of reasonableness. On the whole, although RDFN is loss-making, it seems like the CEO’s pay is fair.

Next Steps:

In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose an executive pay raise. Will this raise take Kelman’s pay beyond the bound of reasonableness, or will it help in retaining the talented executive? Being proactive in governance decisions is a key part to investing, and collectively, investors can make a big difference. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Governance: To find out more about RDFN’s governance, look through our infographic report of the company’s board and management.
  2. 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.
  3. Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of RDFN? 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 editorial-team@simplywallst.com.