Chen Dong Zou has been at the helm as CEO of CNC Holdings Limited (SEHK:8356), which has grown to a market capitalization of HK$210.88M. 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. I will break down Zou’s pay and compare this to the company’s performance over the same period, as well as measure it against other SEHK-listed CEOs leading companies of similar size and profitability. View our latest analysis for CNC Holdings
What has been the trend in 8356’s earnings?
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. Over the last year 8356 released negative earnings of -HK$93.3M , which is a further decline from prior year’s loss of -HK$48.2M. Furthermore, on average, 8356 has been loss-making in the past, with a 5-year average EPS of -HK$0.12. In the situation of negative earnings, the company may be facing a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should be reflective of the current condition of the business. In the latest report, Zou’s total compensation remained stable at HK$1,196,000 since the previous year.
Is 8356’s CEO overpaid relative to the market?
Even though no standard benchmark exists, as remuneration should be tailored to the specific company and market, we can gauge a high-level thresold to see if 8356 is an outlier. This exercise can help direct shareholders to ask the right question about Zou’s incentive alignment. Normally, a SEHK small-cap has a value of HK$2.61B, generates earnings of HK$245M, and remunerates its CEO circa HK$3.3M per annum. Typically I would use earnings and market cap to account for variations in performance, however, 8356’s negative earnings reduces the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Zou is being paid within the bounds of reasonableness. Overall, though 8356 is unprofitable, it seems like the CEO’s pay is appropriate.
What this means for you:
Are you a shareholder? My conclusion is that Zou 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. To find out more about 8356’s governance, look through our infographic report of the company’s board and management.