Wilson Cheung took the reins as CEO of Merdeka Financial Services Group Limited’s (SEHK:8163) and grew market cap to HK$171.37M recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. Today we will assess Cheung’s pay and compare this to the company’s performance over the same period, as well as measure it against other SEHK-listed CEOs leading companies of similar size and profitability. See our latest analysis for Merdeka Financial Services Group

What has 8163’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, 8163 produced negative earnings of -HK$9.01M . However, this is an improvement on prior year’s loss of -HK$133.26M, which may signal a turnaround since 8163 has been loss-making for the past five years, on average, with an EPS of -HK$2.98. Since earnings are heading towards the right direction, CEO pay should be reflective of Cheung’s value creation for shareholders. Over the same period Cheung’s total compensation fell by more than half of the prior year’s level, to HK$3.92M.

What’s a reasonable CEO compensation?

While there is no cookie-cutter approach, as compensation should be tailored to the specific company and market, we can evaluate a high-level benchmark to see if 8163 is an outlier. This outcome helps investors ask the right question about Cheung’s incentive alignment. Typically, a SEHK small-cap has a value of HK$2.61B, generates earnings of HK$245M, and pays its CEO circa HK$3.3M per annum. Typically I would use earnings and market cap to account for variations in performance, however, 8163’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Cheung’s pay outstrips those in comparable companies.

What this means for you:

Whether Cheung is over or underpaid should not be a deciding factor whether or not you invest in 8163. However, the way the company is governed and policies, such as remuneration, are structured, are important considerations for an investor. The best place to start is to understand how well 8163 is placed financially. If you have not done so already, I urge you to complete your research by taking a look at the following: