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Zheng Zhou took the reins as CEO of DreamEast Group Limited’s (SEHK:593) and grew market cap to HK$2.34B 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. I will break down Zhou’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 DreamEast Group
What has 593’s performance been like?
593 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, 593 produced a profit of HK$115.58M , which is an increase of 196.63% from its last year’s earnings of HK$38.96M. This is an encouraging signal that 593 aims to sustain a strong track record of generating profits regardless of the challenges. As profits are moving up and up, CEO pay should echo Zhou’s hard work. During the same period, Zhou’s total compensation remained stable at HK$120.00K since the previous year. In addition to this, Zhou’s pay is also made up of 21.79% non-cash elements, which means that fluctuations in 593’s share price can impact the true 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, as compensation should account for specific factors of the company and market, we can estimate a high-level thresold to see if 593 is an outlier. This outcome helps investors ask the right question about Zhou’s incentive alignment. Normally, a SEHK small-cap is worth around HK$2.61B, generates earnings of HK$245M, and remunerates its CEO circa HK$3.3M annually. Considering the size of 593 in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Zhou is paid less than other SEHK CEOs of small-caps, on average.
Next Steps:
My conclusion is that Zhou 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 highly recommend you to complete your research by taking a look at the following: