Craig Anderson took the reins as CEO of Smart Marine Systems Limited’s (ASX:SM8) and grew market cap to AU$2.76M recently. 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. Today we will assess Anderson’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 Smart Marine Systems

What has SM8’s performance been like?

Profitability of a company is a strong indication of SM8’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Anderson’s performance. Over the last year SM8 produced negative earnings of -AU$4.18M , which is a further decline from prior year’s loss of -AU$1.56M. Additionally, on average, SM8 has been loss-making in the past, with a 5-year average EPS of -AU$0.033. In the situation of negative earnings, the company may be facing a period of reinvestment and growth, or it can be a signal of some headwind. In any case, CEO compensation should mirror the current state of the business. In the latest financial report, Anderson’s total remuneration more than doubled, reaching AU$297.08K . Although I couldn’t find information on the composition of Anderson’s pay, if some portion were non-cash items such as stocks and options, then fluxes in SM8’s share price can move the real level of what the CEO actually receives.

Is SM8’s CEO overpaid relative to the market?

Despite the fact that there is no cookie-cutter approach, as remuneration should account for specific factors of the company and market, we can fashion a high-level base line to see if SM8 deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Anderson’s incentive alignment. Typically, an Australian small-cap has a value of $140M, creates earnings of $10M, and remunerates its CEO circa $500,000 annually. Usually I would use earnings and market cap to account for variations in performance, however, SM8’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Anderson is paid aptly compared to those in similar-sized companies. Overall, although SM8 is loss-making, it seems like the CEO’s pay is sound.