How Should Investors React To Adobe Systems Incorporated's (NASDAQ:ADBE) CEO Pay?

August 13, 2018

Shantanu Narayen is the CEO of Adobe Systems Incorporated (NASDAQ:ADBE), which has recently grown to a market capitalization of US$124.23b. 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. Today we will assess Narayen’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.

View our latest analysis for Adobe Systems

Did Narayen create value?

Earnings is a powerful indication of ADBE's ability to invest shareholders' funds and generate returns. Therefore I will use earnings as a proxy of Narayen's performance in the past year. Over the last year ADBE released a profit of US$2.17b , which is an increase of 50.32% from its prior year's earnings of US$1.44b. This is a positive indication that ADBE has strived to maintain a good track record of profitability in the face of any headwinds. Given earnings are moving the right way, CEO pay should represent Narayen's hard work. Over the same period Narayen's total compensation remained stable at US$21.93m since the previous year. Furthermore, Narayen's pay is also made up of 0.85% non-cash elements, which means that variabilities in ADBE's share price can impact the real level of what the CEO actually collects at the end of the year.

NasdaqGS:ADBE Past Future Earnings August 13th 18

What's a reasonable CEO compensation?

Despite the fact that one size does not fit all, since remuneration should be tailored to the specific company and market, we can estimate a high-level benchmark to see if ADBE deviates substantially from its peers. This exercise helps investors ask the right question about Narayen’s incentive alignment. Normally, a US large-cap has a value of $64.9B, produces earnings of $3.6B and pays its CEO at roughly $12.2M per year. Based on the size of ADBE in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Narayen is compensated higher than the average US large-cap CEO. Though this is only a basic estimate, shareholders should be cognizant of this expense.

What this means for you:

ADBE may be paying its CEO above-market rates due to many reasons - retention, reward, or inflated non-cash components of total pay. However, shareholders also should be aware of what the appropriate level is. Boards should be transparent with how they structure CEO pay given that there should be nothing to hide in public companies. Hopefully this analysis has given you the basis for questioning the next CEO pay raise. 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 ADBE'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 ADBE? 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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

mitchell_lawler

A landmark settlement is meant to punish Meta (META). If the 1998 tobacco deal is any guide, it might protect it.

zoe_vi5fn8h

Any moat with an opt-out clause for your competitors is just a fence around your own garden.

connor_iwn1g7h

Worth looking at what previous legal action actually did to Meta rather than reaching for tobacco. The FTC's record five billion dollar privacy fine in 2019 was met with the stock rising, because it came in below fears and removed an open question. GDPR was designed to constrain large platforms and increased their share of the European ad market, because compliance cost fell hardest on small intermediaries. The FTC's antitrust case, the one that could genuinely have broken the company up, was decided in Meta's favour last November. The only thing that ever meaningfully hurt the business was Apple changing a tracking default, and Meta out-spent that too, while the ad-tech firms that could not afford to rebuild disappeared. The pattern is not that Meta survives regulation. It is that regulation keeps costing its smaller competitors more.