John Tang took the reins as CEO of JC International Group Limited’s (ASX:JCI) and grew market cap to AU$33.95M recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Tang’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 JC International Group
What has JCI’s performance been like?
Earnings is a powerful indication of JCI’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Tang’s performance in the past year. Recently, JCI released an earnings of AU$7.11M , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of AU$9.20M. However, JCI has strived to sustain a strong track record of generating profits, given its average EPS of AU$0.14 over the past couple of years. During times of declining earnings, the company may be facing a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should represent the current state of the business. In the latest financial statments, Tang’s total remuneration fell by a minor -4.92%, to AU$70.95K. Although I couldn’t find information on the composition of Tang’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in JCI’s share price can affect the actual level of what the CEO actually receives.
What’s a reasonable CEO compensation?
Though one size does not fit all, since compensation should be tailored to the specific company and market, we can estimate a high-level benchmark to see if JCI deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Tang’s incentive alignment. Typically, an Australian small-cap has a value of $140M, creates earnings of $10M, and remunerates its CEO at roughly $500,000 per annum. Taking into account the size of JCI in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Tang is paid lower than the average Australian small-cap CEO.
Next Steps:
My conclusion is that Tang 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: