Rob Willes is the CEO of Challenger Energy Limited (ASX:CEL), which has recently grown to a market capitalization of AU$6.62M. 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 Willes’s pay and compare this to the company’s performance over the same period, as well as measure it against other Australian CEOs leading companies of similar size and profitability. Check out our latest analysis for Challenger Energy
Did Willes create value?
Earnings is a powerful indication of CEL’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Willes’s performance in the past year. Recently, CEL produced negative earnings of -AU$767.59K . However, this is an improvement on prior year’s loss of -AU$977.79K, which may signal a turnaround since CEL has been loss-making for the past five years, on average, with an EPS of -AU$0.013. As profits are moving up and up, CEO pay should mirror Willes’s hard work. During the same period, Willes’s total compensation grew by a mere 0.35% to AU$375.00K.
Is CEL’s CEO overpaid relative to the market?
Though no standard benchmark exists, as remuneration should account for specific factors of the company and market, we can determine a high-level yardstick to see if CEL is an outlier. This exercise can help shareholders ask the right question about Willes’s incentive alignment. Normally, an Australian small-cap is worth around $140M, produces earnings of $10M, and remunerates its CEO at roughly $500,000 annually. Typically I would use earnings and market cap to account for variations in performance, however, CEL’s negative earnings reduces the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Willes is remunerated sensibly relative to peers. Putting everything together, though CEL is loss-making, it seems like the CEO’s pay is appropriate.
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 Willes’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 highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about CEL’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 CEL? 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 pass 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.