Mark Basso-Brusa took the helm as East Energy Resources Limited’s (ASX:EER) CEO and grew market cap to AU$1.07M recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Basso-Brusa’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. Check out our latest analysis for East Energy Resources
Did Basso-Brusa create value?
Profitability of a company is a strong indication of EER’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Basso-Brusa’s performance. In the past year, EER released negative earnings of -AU$13.93M , which is a further decline from prior year’s loss of -AU$2.60M. Additionally, on average, EER has been loss-making in the past, with a 5-year average EPS of -AU$0.033. In the situation of unprofitability the company may be facing a period of reinvestment and growth, or it can be an indication of some headwind. In any case, CEO compensation should mirror the current state of the business. In the latest report, Basso-Brusa’s total remuneration remained stable at AU$145.25K since the previous year. Although I couldn’t find information on the composition of Basso-Brusa’s pay, if some portion were non-cash items such as stocks and options, then variabilities in EER’s share price can affect the true level of what the CEO actually takes home at the end of the day.
Is EER overpaying the CEO?
While no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can fashion a high-level base line to see if EER is an outlier. This outcome can help shareholders ask the right question about Basso-Brusa’s incentive alignment. Generally, an Australian small-cap has a value of $140M, produces earnings of $10M, and pays its CEO circa $500,000 per year. Usually I’d use market cap and profit as factors determining performance, however, EER’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Basso-Brusa is being paid within the bounds of reasonableness. Overall, even though EER is unprofitable, it seems like the CEO’s pay is fair.