Kazuya Nakamura took the helm as A1 Investments and Resources Limited’s (ASX:AYI) CEO and grew market cap to AU$10.81M recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Nakamura’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 A1 Investments and Resources

Did Nakamura create value?

Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. In the past year, AYI delivered negative earnings of -AU$902.03K . But this is an improvement on prior year’s loss of -AU$1.58M, which may signal a turnaround since AYI has been loss-making for the past five years, on average, with an EPS of -AU$0.0039. Since earnings are heading towards the right direction, CEO pay should mirror Nakamura’s value creation for shareholders. During the same period, Nakamura’s total remuneration fell by a meaningful rate of -32.21%, to AU$76.60K.

Is AYI overpaying the CEO?

Despite the fact that one size does not fit all, as remuneration should be tailored to the specific company and market, we can estimate a high-level thresold to see if AYI deviates substantially from its peers. This outcome can help shareholders ask the right question about Nakamura’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 annum. Usually I’d use market cap and profit as factors determining performance, however, AYI’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Nakamura is paid aptly compared to those in similar-sized companies. On the whole, although AYI is unprofitable, it seems like the CEO’s pay is fair.

Next Steps:

In order to determine whether or not you should invest in AYI, 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 AYI makes money, and factors impacting your return on investment. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Governance: To find out more about AYI’s governance, look through our infographic report of the company’s board and management.

2. 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.

3. Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of AYI? 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.