Stephen Leung took the helm as Multistack International Limited’s (ASX:MSI) CEO and grew market cap to AU$673.82K 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 Leung’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. See our latest analysis for Multistack International

What has MSI’s performance been like?

MSI 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. In the past year, MSI delivered negative earnings of -AU$46.58K . However, this is an improvement on prior year’s loss of -AU$525.10K, which may signal a turnaround since MSI has been loss-making for the past five years, on average, with an EPS of -AU$0.003. As profits are moving up and up, CEO pay should mirror Leung’s valued-adding activities. During the same period, Leung’s total compensation more than doubled, reaching AU$77.19K , but from a small number. Although I couldn’t find information on the breakdown of Leung’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in MSI’s share price can affect the actual level of what the CEO actually receives.

Is MSI’s CEO overpaid relative to the market?

Though there is no cookie-cutter approach, since remuneration should be tailored to the specific company and market, we can estimate a high-level benchmark to see if MSI is an outlier. This outcome can help direct shareholders to ask the right question about Leung’s incentive alignment. On average, an Australian small-cap is worth around $140M, creates earnings of $10M, and remunerates its CEO circa $500,000 per annum. Normally I would look at market cap and earnings as a proxy for performance, however, MSI’s negative earnings reduces the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Leung is being paid within the bounds of reasonableness. Overall, even though MSI is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.

Next Steps:

My conclusion is that Leung 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: