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Leading WorleyParsons Limited (ASX:WOR) as the CEO, Andrew Wood took the company to a valuation of AU$4.86B. 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 Wood’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 WorleyParsons
What has WOR’s performance been like?
WOR 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. Over the last year WOR released a profit of AU$37.30M , moving WOR from negative territory of -AU$2.00M in the prior year to profitability. Though, the variability in earnings over the last few years makes us less confidence in forecasting future outcome based on past data. Given earnings are moving the right way, CEO pay should be reflective of Wood’s value creation for shareholders. During the same period, Wood’s total remuneration increased by 65.48% to AU$2.94M. Moreover, Wood’s pay is also made up of 7.18% non-cash elements, which means that variabilities in WOR’s share price can impact the real level of what the CEO actually receives.
Is WOR’s CEO overpaid relative to the market?
Even though there is no cookie-cutter approach, as remuneration should account for specific factors of the company and market, we can determine a high-level benchmark to see if WOR is an outlier. This exercise can help direct shareholders to ask the right question about Wood’s incentive alignment. Typically, an Australian mid-cap has a value of $1.7B, creates earnings of $95M and pays its CEO circa $1.5M per annum. Considering WOR’s size and performance, in terms of market cap and earnings, it seems that Wood is paid on a similar level to other Australian CEOs of mid-caps, on average. This indicates that Wood’s pay is fair.
Next Steps:
In order to determine whether or not you should invest in WOR, 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 WOR 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: