Nathan Wise took the helm as TAG Pacific Limited’s (ASX:TAG) CEO and grew market cap to AU$7.46M recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Wise’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 TAG Pacific
What has TAG’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. In the past year, TAG produced negative earnings of -AU$3.54M , which is a further decline from prior year’s loss of -AU$1.16M. Furthermore, on average, TAG has been loss-making in the past, with a 5-year average EPS of -AU$0.028. During times of unprofitability the company may be going through a period of reinvestment and growth, or it can be a signal of some headwind. In any event, CEO compensation should echo the current condition of the business. In the most recent financial report, Wise’s total remuneration grew by a mere 4.74% to AU$335.60K. Moreover, Wise’s pay is also made up of 2.44% non-cash elements, which means that fluctuations in TAG’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?
Despite the fact that one size does not fit all, as compensation should account for specific factors of the company and market, we can estimate a high-level yardstick to see if TAG deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about Wise’s incentive alignment. On average, an Australian small-cap is worth around $140M, produces earnings of $10M, and remunerates its CEO circa $500,000 per annum. Normally I’d use market cap and profit as factors determining performance, however, TAG’s negative earnings reduces the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Wise is paid aptly compared to those in similar-sized companies. Putting everything together, though TAG is unprofitable, it seems like the CEO’s pay is fair.
Next Steps:
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in TAG, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. If you have not done so already, I highly recommend you to complete your research by taking a look at the following: