Emily D’Cruz is the CEO of Lanka Graphite Limited (ASX:LGR), which has recently grown to a market capitalization of AU$5.98M. 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 D’Cruz’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. See our latest analysis for Lanka Graphite
What has been the trend in LGR’s earnings?
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. Recently, LGR produced negative earnings of -AU$1.68M , which is a further decline from prior year’s loss of -AU$1.46M. Additionally, on average, LGR has been loss-making in the past, with a 5-year average EPS of -AU$0.034. In the situation of negative earnings, 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 echo the current state of the business. In the latest financial statments, D’Cruz’s total compensation fell by a non-trivial rate of -35.69%, to AU$163.90K. Moreover, D’Cruz’s pay is also made up of 22.88% non-cash elements, which means that fluxes in LGR’s share price can affect the actual level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
Even though one size does not fit all, as remuneration should be tailored to the specific company and market, we can evaluate a high-level benchmark to see if LGR is an outlier. This exercise can help direct shareholders to ask the right question about D’Cruz’s incentive alignment. On average, an Australian small-cap is worth around $140M, creates earnings of $10M, and remunerates its CEO at roughly $500,000 per year. Normally I would use earnings and market cap to account for variations in performance, however, LGR’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like D’Cruz is paid aptly compared to those in similar-sized companies. Putting everything together, even though LGR is unprofitable, it seems like the CEO’s pay is fair.