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Leading RLJ Entertainment Inc (NASDAQ:RLJE) as the CEO, Miguel Penella took the company to a valuation of US$70.09M. 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 Penella’s pay and compare this to the company’s performance over the same period, as well as measure it against other US CEOs leading companies of similar size and profitability. Check out our latest analysis for RLJ Entertainment
Did Penella create value?
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, RLJE produced negative earnings of -US$7.50M . However, this is an improvement on prior year’s loss of -US$15.87M, which may signal a turnaround since RLJE has been loss-making for the past five years, on average, with an EPS of -US$4.74. As profits are moving up and up, CEO pay should echo Penella’s valued-adding activities. During this period Penella’s total remuneration increased over two-fold, reaching US$5.62M .
Is RLJE overpaying the CEO?
Though there is no cookie-cutter approach, as compensation should be tailored to the specific company and market, we can estimate a high-level thresold to see if RLJE deviates substantially from its peers. This exercise helps investors ask the right question about Penella’s incentive alignment. Normally, a US small-cap has a value of $1B, generates earnings of $96M, and remunerates its CEO at roughly $2.7M per year. Typically I would use earnings and market cap to account for variations in performance, however, RLJE’s negative earnings lower the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Penella’s pay exceeds its peer group.
What this means for you:
CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Why is Penella remuneration above that of similar companies? 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:
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Governance: To find out more about RLJE’s governance, look through our infographic report of the company’s board and management.
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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.
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Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of RLJE? 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.