Leading Phileo Australia Limited (ASX:PHI) as the CEO, Rudy Eng took the company to a valuation of AU$354.36M. 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 Eng’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 Phileo Australia

Did Eng create value?

PHI can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. Over the last year PHI produced an earnings of AU$14.99M , which is an increase of 22.55% from its previous year’s earnings of AU$12.23M. This is an encouraging signal that PHI aims to sustain a strong track record of generating profits regardless of the challenges. Since earnings are heading towards the right direction, CEO pay should be reflective of Eng’s valued-adding activities. During this period Eng’s total remuneration grew by a mere 3.52% to AU$499.22K. Although I couldn’t find information on the breakdown of Eng’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in PHI’s share price can impact the actual level of what the CEO actually collects at the end of the year.

Is PHI overpaying the CEO?

While one size does not fit all, as compensation should account for specific factors of the company and market, we can determine a high-level yardstick to see if PHI is an outlier. This exercise helps investors ask the right question about Eng’s incentive alignment. Generally, an Australian small-cap is worth around $140M, generates earnings of $10M, and pays its CEO circa $500,000 annually. Accounting for the size of PHI in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Eng is compensated similar to other Australian CEOs of small-caps, on average. This may mean that PHI is appropriately compensating its CEO.

Next Steps:

In order to determine whether or not you should invest in PHI, your thesis should be built on fundamentals. Even though CEO pay isn’t technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how PHI makes money, and factors impacting your return on investment. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Governance: To find out more about PHI’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 PHI? 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.