Leading Big 5 Sporting Goods Corporation (NASDAQ:BGFV) as the CEO, Steven Miller took the company to a valuation of US$142.42m. 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 Miller’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 BGFV’s earnings?Earnings is a powerful indication of BGFV’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Miller’s performance in the past year. Most recently, BGFV released negative earnings of -US$5.53m , compared to the previous year’s positive earnings. Furthermore, BGFV hasn’t always been loss-making, with an average EPS of US$0.73 over the past five years. During times of unprofitability the company may be facing a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should echo the current state of the business. From the latest report, Miller’s total compensation rose by 5.30% to US$911.08k. Furthermore, Miller’s pay is also made up of 16.35% non-cash elements, which means that variabilities in BGFV’s share price can impact the real level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
While one size does not fit all, as compensation should be tailored to the specific company and market, we can fashion a high-level yardstick to see if BGFV is an outlier. This exercise helps investors ask the right question about Miller’s incentive alignment. Typically, a US small-cap has a value of $1B, generates earnings of $96M, and remunerates its CEO circa $2.7M per annum. Typically I would look at market cap and earnings as a proxy for performance, however, BGFV’s negative earnings reduces the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Miller is remunerated sensibly relative to peers. Putting everything together, even though BGFV is unprofitable, it seems like the CEO’s pay is fair.
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 Miller’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:
- Governance: To find out more about BGFV’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 BGFV? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!