Leading Encounter Resources Limited (ASX:ENR) as the CEO, Will Robinson took the company to a valuation of AU$12.86M. 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 Robinson’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 Encounter Resources
What has been the trend in ENR’s earnings?
Earnings is a powerful indication of ENR’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Robinson’s performance in the past year. Over the last year ENR released negative earnings of -AU$1.22M . However, this is an improvement on prior year’s loss of -AU$5.04M, which may signal a turnaround since ENR has been loss-making for the past five years, on average, with an EPS of -AU$0.013. Since earnings are heading towards the right direction, CEO pay should be reflective of Robinson’s value creation for shareholders. During the same period, Robinson’s total remuneration rose by 12.35% to AU$328.75K.
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 determine a high-level yardstick to see if ENR deviates substantially from its peers. This exercise can help shareholders ask the right question about Robinson’s incentive alignment. On average, an Australian small-cap is worth around $140M, generates earnings of $10M, and remunerates its CEO at roughly $500,000 annually. Usually I’d use market cap and profit as factors determining performance, however, ENR’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Robinson is being paid within the bounds of reasonableness. Putting everything together, even though ENR is unprofitable, it seems like the CEO’s pay is sound.
Next Steps:
My conclusion is that Robinson 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: