Leading IPB Petroleum Limited (ASX:IPB) as the CEO, Brendan Brown took the company to a valuation of AU$2.89M. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Brown’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. Check out our latest analysis for IPB Petroleum
Did Brown create value?
Profitability of a company is a strong indication of IPB’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Brown’s performance. Recently, IPB released negative earnings of -AU$2.50M , which is a further decline from prior year’s loss of -AU$486.39K. Furthermore, on average, IPB has been loss-making in the past, with a 5-year average EPS of -AU$0.017. During times 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 condition of the business. From the latest report, Brown’s total remuneration declined by a meaningful rate of -32.21%, to AU$209.06K.
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 yardstick to see if IPB deviates substantially from its peers. This outcome can help shareholders ask the right question about Brown’s incentive alignment. Typically, an Australian small-cap is worth around $140M, produces earnings of $10M, and remunerates its CEO at roughly $500,000 per year. Usually I’d use market cap and profit as factors determining performance, however, IPB’s negative earnings lower the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Brown is remunerated sensibly relative to peers. Overall, even though IPB is loss-making, it seems like the CEO’s pay is fair.
Next Steps:
CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Brown remunerated appropriately based on other factors we have not covered today? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. If you have not done so already, I urge you to complete your research by taking a look at the following: