Leading Santana Minerals Limited (ASX:SMI) as the CEO, Tony McDonald took the company to a valuation of AU$3.16M. 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. I will break down McDonald’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 Santana Minerals
What has been the trend in SMI’s earnings?
SMI 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. Recently, SMI released negative earnings of -AU$811.51K . But this is an improvement on prior year’s loss of -AU$5.08M, which may signal a turnaround since SMI has been loss-making for the past five years, on average, with an EPS of -AU$0.032. As profits are moving up and up, CEO pay should represent McDonald’s valued-adding activities. During this period McDonald’s total compensation remained stable at AU$207.70K since the previous year.
What’s a reasonable CEO compensation?
Even though there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can gauge a high-level base line to see if SMI deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about McDonald’s incentive alignment. On average, an Australian small-cap has a value of $140M, creates earnings of $10M, and pays its CEO at roughly $500,000 per annum. Typically I’d use market cap and profit as factors determining performance, however, SMI’s negative earnings lower the effectiveness of this method. Given the range of pay for small-cap executives, it seems like McDonald is paid aptly compared to those in similar-sized companies. On the whole, even though SMI is unprofitable, 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 McDonald 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 highly recommend you to complete your research by taking a look at the following: