Vik Verma took the reins as CEO of 8×8 Inc’s (NYSE:EGHT) and grew market cap to US$2.04b 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 Verma’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.
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What has been the trend in EGHT’s earnings?
Profitability of a company is a strong indication of EGHT’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Verma’s performance. Over the last year EGHT produced negative earnings of -US$104.50m , which is a further decline from prior year’s loss of -US$4.75m. But EGHT hasn’t always been loss-making, with an average EPS of US$0.09 over the past five years. During times of negative earnings, the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should mirror the current condition of the business. In the latest report, Verma’s total remuneration dropped by a trivial -4.38%, to US$4.76m. Moreover, Verma’s pay is also comprised of non-cash items, which means that variabilities in EGHT’s share price can impact the real level of what the CEO actually collects at the end of the year.
Is EGHT’s CEO overpaid relative to the market?
Though no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can gauge a high-level benchmark to see if EGHT is an outlier. This exercise helps investors ask the right question about Verma’s incentive alignment. Typically, a US mid-cap has a value of $5B, produces earnings of $290M and pays its CEO circa $5.3M annually. Usually I’d use market cap and profit as factors determining performance, however, EGHT’s negative earnings lower the usefulness of my formula. Given the range of pay for mid-cap executives, it seems like Verma is remunerated sensibly relative to peers. Putting everything together, although EGHT is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.
Next Steps:
In order to determine whether or not you should invest in EGHT, 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 EGHT makes money, and factors impacting your return on investment. 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 EGHT’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 EGHT? 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.