C. Paragash is the CEO of Sterling Plantations Limited (ASX:SBI), which has recently grown to a market capitalization of AU$650.00K. 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 Paragash’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. View our latest analysis for Sterling Plantations

What has SBI’s performance been like?

SBI 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. In the past year, SBI released negative earnings of -AU$2.94M . But this is an improvement on prior year’s loss of -AU$10.87M, which may signal a turnaround since SBI has been loss-making for the past five years, on average, with an EPS of -AU$0.11. Given earnings are moving the right way, CEO pay should represent Paragash’s valued-adding activities. During the same period, Paragash’s total remuneration fell by a non-trivial rate of -41.39%, to AU$113.25K. Although I couldn’t find information on the breakdown of Paragash’s pay, if some portion were non-cash items such as stocks and options, then fluxes in SBI’s share price can impact the actual level of what the CEO actually collects at the end of the year.

What’s a reasonable CEO compensation?

Despite the fact that one size does not fit all, since compensation should be tailored to the specific company and market, we can determine a high-level benchmark to see if SBI is an outlier. This outcome can help direct shareholders to ask the right question about Paragash’s incentive alignment. Normally, an Australian small-cap has a value of $140M, creates earnings of $10M, and remunerates its CEO circa $500,000 per year. Usually I’d use market cap and profit as factors determining performance, however, SBI’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Paragash is remunerated sensibly relative to peers. On the whole, even though SBI is unprofitable, it seems like the CEO’s pay is sound.

Next Steps:

My conclusion is that Paragash is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. If you have not done so already, I urge you to complete your research by taking a look at the following: