Silviu Itescu took the reins as CEO of Mesoblast Limited’s (ASX:MSB) and grew market cap to AU$641.19M recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Itescu’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 Mesoblast

Did Itescu create value?

Earnings is a powerful indication of MSB’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Itescu’s performance in the past year. Most recently, MSB delivered negative earnings of -US$64.04M , which is a further decline from prior year’s loss of -US$10.76M. Furthermore, on average, MSB has been loss-making in the past, with a 5-year average EPS of -US$0.13. In the situation of unprofitability the company may be facing a period of reinvestment and growth, or it can be a signal of some headwind. Regardless, CEO compensation should represent the current state of the business. From the latest report, Itescu’s total compensation increased by 63.07% to US$1.85M.

Is MSB’s CEO overpaid relative to the market?

Though one size does not fit all, as compensation should be tailored to the specific company and market, we can estimate a high-level thresold to see if MSB deviates substantially from its peers. This exercise helps investors ask the right question about Itescu’s incentive alignment. Typically, an Australian mid-cap has a value of $1.7B, generates earnings of $95M and pays its CEO circa $1.5M per annum. Usually I would look at market cap and earnings as a proxy for performance, however, MSB’s negative earnings lower the usefulness of my formula. Given the range of pay for mid-cap executives, it seems like Itescu’s pay outstrips those in comparable companies.

What this means for you:

In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose another executive pay raise. Although this analysis is relatively simplified, the fact that Itescu’s pay is above its peer group should raise questions as to why this may be the case. 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 MSB’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 MSB? 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.