Gayn Erickson took the reins as CEO of Aehr Test Systems’s (NASDAQ:AEHR) and grew market cap to US$55.98m 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. I will break down Erickson’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 AEHR’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. Most recently, AEHR delivered a profit of US$528.00k , moving AEHR from negative territory of -US$5.65m in the prior year to profitability. This could signal a turnaround given that AEHR has been loss-making for the past five years, on average, with an EPS of -US$0.31. Given earnings are moving the right way, CEO pay should mirror Erickson’s valued-adding activities. During the same period, Erickson’s total compensation grew by 14.53% to US$438.47k. In addition to this, Erickson’s pay is also made up of 29.82% non-cash elements, which means that fluctuations in AEHR’s share price can move the true level of what the CEO actually takes home at the end of the day.
Is AEHR overpaying the CEO?
Even though one size does not fit all, as remuneration should account for specific factors of the company and market, we can evaluate a high-level yardstick to see if AEHR is an outlier. This exercise helps investors ask the right question about Erickson’s incentive alignment. Generally, a US small-cap has a value of $1B, produces earnings of $96M, and pays its CEO at roughly $2.7M annually. Taking into account AEHR’s size and performance, in terms of market cap and earnings, it appears that Erickson is compensated similar to other comparable US CEOs of profitable small-caps. This indicates that Erickson’s pay is fair.
You can breathe easy knowing that shareholder funds aren’t being used to overpay AEHR’s CEO. However, on the flipside, you should ask whether Erickson 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 AEHR’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 AEHR? 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.