Travis Dillon took the reins as CEO of Ruralco Holdings Limited’s (ASX:RHL) and grew market cap to AU$316.71M 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 Dillon’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 Ruralco Holdings

What has been the trend in RHL’s earnings?

Profitability of a company is a strong indication of RHL’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Dillon’s performance. Over the last year RHL delivered a profit of AU$22.42M , which is an increase of 421.88% from its prior year’s earnings of AU$4.30M. This is a positive indication that RHL has strived to maintain a good track record of profitability in the face of any headwinds. Given earnings are moving the right way, CEO pay should be reflective of Dillon’s hard work. During this period Dillon’s total remuneration grew by 36.89% to AU$1.65M. In addition to this, Dillon’s pay is also made up of 0.81% non-cash elements, which means that fluctuations in RHL’s share price can impact the true level of what the CEO actually receives.

What’s a reasonable CEO compensation?

While one size does not fit all, since compensation should be tailored to the specific company and market, we can evaluate a high-level thresold to see if RHL is an outlier. This outcome can help shareholders ask the right question about Dillon’s incentive alignment. On average, an Australian small-cap has a value of $140M, creates earnings of $10M, and remunerates its CEO at roughly $500,000 per year. Based on the size of RHL in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Dillon is paid above other Australian CEOs of small-caps, on average. Even though this is simply a rudimentary calculation, shareholders should be aware of this expense.

What this means for you:

RHL may be paying its CEO above-market rates due to many reasons – retention, reward, or inflated non-cash components of total pay. However, shareholders also should be aware of what the appropriate level is. Boards should be transparent with how they structure CEO pay given that there should be nothing to hide in public companies. Hopefully this analysis has given you the basis for questioning the next CEO pay raise. If you have not done so already, I highly recommend you to complete your research by taking a look at the following: