Bill Annett took the reins as CEO of OncoCyte Corporation’s (AMEX:OCX) and grew market cap to US$82.66M recently. 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 Annett’s pay and compare this to the company’s performance over the same period, as well as measure it against other US CEOs leading companies of similar size and profitability. Check out our latest analysis for OncoCyte

What has OCX’s performance been like?

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 OCX released negative earnings of -US$18.52M , which is a further decline from prior year’s loss of -US$11.60M. Additionally, on average, OCX has been loss-making in the past, with a 5-year average EPS of -US$0.40. In the situation of negative earnings, the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should mirror the current condition of the business. From the latest financial report, Annett’s total remuneration declined by -10.11%, to US$1.04M. Furthermore, Annett’s pay is also comprised of non-cash items, which means that fluctuations in OCX’s share price can move the real level of what the CEO actually takes home at the end of the day.

What’s a reasonable CEO compensation?

Though no standard benchmark exists, since remuneration should account for specific factors of the company and market, we can evaluate a high-level base line to see if OCX is an outlier. This outcome helps investors ask the right question about Annett’s incentive alignment. Typically, a US small-cap has a value of $1B, creates earnings of $96M, and pays its CEO at roughly $2.7M annually. Normally I would use earnings and market cap to account for variations in performance, however, OCX’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Annett is being paid within the bounds of reasonableness. Overall, even though OCX is loss-making, it seems like the CEO’s pay is appropriate.

Next Steps:

CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Annett remunerated appropriately based on other factors we have not covered today? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. If you have not done so already, I urge you to complete your research by taking a look at the following: