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Aniruddha Basu took the reins as CEO of CESC Limited’s (NSE:CESC) and grew market cap to ₹131.12b recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. Today we will assess Basu’s pay and compare this to the company’s performance over the same period, as well as measure it against other Indian CEOs leading companies of similar size and profitability.
View our latest analysis for CESC
Did Basu create value?
Earnings is a powerful indication of CESC’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Basu’s performance in the past year. In the past year, CESC released an earnings of ₹10.04b , which is an increase of 45.3% from its prior year’s earnings of ₹6.91b. This is an encouraging signal that CESC aims to sustain a strong track record of generating profits regardless of the challenges. Since earnings are heading towards the right direction, CEO pay should mirror Basu’s valued-adding activities. In the same year, Basu’s total remuneration grew by 48.1% to ₹33.4m. Although I couldn’t find information on the breakdown of Basu’s pay, if some portion were non-cash items such as stocks and options, then fluxes in CESC’s share price can impact the real level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Even though no standard benchmark exists, since compensation should account for specific factors of the company and market, we can estimate a high-level benchmark to see if CESC deviates substantially from its peers. This outcome helps investors ask the right question about Basu’s incentive alignment. Normally, a BSE or NSEI small-cap has a value of ₹9.88b, generates earnings of ₹430m, and pays its CEO circa ₹7.3m per year. Allowing for the size of CESC in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Basu is paid on a similar level to other comparable BSE and NSEI CEOs of profitable small-caps. This indicates that Basu’s pay is fair.
Next Steps:
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 Basu’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: