Malcolm Day is the CEO of Delecta Limited (ASX:DLC), which has recently grown to a market capitalization of AU$3.17M. 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. Today we will assess Day’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 Delecta

What has been the trend in DLC’s earnings?

Earnings is a powerful indication of DLC’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Day’s performance in the past year. In the past year, DLC delivered negative earnings of -AU$758.00K , compared to the previous year’s positive earnings. Though, on average, DLC has been loss-making in the past, with a 5-year average EPS of -AU$0.0013. In the situation of negative earnings, 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 represent the current condition of the business. From the latest financial statments, Day’s total remuneration increased over two-fold, to AU$327.60K . Although I couldn’t find information on the composition of Day’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in DLC’s share price can impact the true level of what the CEO actually collects at the end of the year.

Is DLC overpaying the CEO?

Even though one size does not fit all, as compensation should account for specific factors of the company and market, we can gauge a high-level yardstick to see if DLC is an outlier. This exercise can help shareholders ask the right question about Day’s incentive alignment. Normally, an Australian small-cap is worth around $140M, creates earnings of $10M, and remunerates its CEO circa $500,000 per annum. Normally I would look at market cap and earnings as a proxy for performance, however, DLC’s negative earnings reduces the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Day is paid aptly compared to those in similar-sized companies. On the whole, though DLC 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 DLC, 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 urge you to complete your research by taking a look at the following:

1. Governance: To find out more about DLC’s governance, look through our infographic report of the company’s board and management.

2. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

3. Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of DLC? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.