Did Raab create value?FARO can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. Recently, FARO delivered negative earnings of -US$12.60m , compared to the previous year’s positive earnings. Additionally, FARO hasn’t always been loss-making, with an average EPS of US$1.00 over the past five years. In the situation of negative earnings, the company may be going through a period of reinvestment and growth, or it can be an indication of some headwind. In any case, CEO compensation should be reflective of the current condition of the business. In the most recent report, Raab’s total compensation grew by 34.22% to US$2.46m. Moreover, Raab’s pay is also made up of 63.39% non-cash elements, which means that fluxes in FARO’s share price can move the true level of what the CEO actually takes home at the end of the day.
Is FARO overpaying the CEO?
Despite the fact that there is no cookie-cutter approach, since compensation should be tailored to the specific company and market, we can gauge a high-level base line to see if FARO deviates substantially from its peers. This exercise helps investors ask the right question about Raab’s incentive alignment. Normally, a US small-cap is worth around $1B, generates earnings of $96M, and remunerates its CEO circa $2.7M per annum. Usually I would use earnings and market cap to account for variations in performance, however, FARO’s negative earnings lower the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Raab is paid aptly compared to those in similar-sized companies. Putting everything together, even though FARO is loss-making, it seems like the CEO’s pay is reflective of the appropriate level.
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in FARO, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. 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 FARO’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 FARO? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!