Shawn Kao took the reins as CEO of San Teh Ltd’s (SGX:S46) and grew market cap to S$71.83M recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. I will break down Kao’s pay and compare this to the company’s performance over the same period, as well as measure it against other SGX-listed CEOs leading companies of similar size and profitability. Check out our latest analysis for San Teh
Did Kao create value?
Profitability of a company is a strong indication of S46’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Kao’s performance. Recently, S46 delivered negative earnings of -S$3.22M . But this is an improvement on prior year’s loss of -S$6.23M, which may signal a turnaround since S46 has been loss-making for the past five years, on average, with an EPS of -S$0.021. As profits are moving up and up, CEO pay should be reflective of Kao’s valued-adding activities. During the same period, Kao’s total remuneration more than doubled, reaching S$0 , though from a small number. Although I couldn’t find information on the breakdown of Kao’s pay, if some portion were non-cash items such as stocks and options, then fluxes in S46’s share price can impact the true level of what the CEO actually receives.
Is S46’s CEO overpaid relative to the market?
Though no standard benchmark exists, as remuneration should be tailored to the specific company and market, we can evaluate a high-level yardstick to see if S46 is an outlier. This outcome can help shareholders ask the right question about Kao’s incentive alignment. Normally, a SGX small-cap is worth around SG$396M, produces earnings of SG$29.7M, and pays its CEO circa SG$1.2M annually. Typically I would look at market cap and earnings as a proxy for performance, however, S46’s negative earnings reduces the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Kao is being paid within the bounds of reasonableness. Overall, although S46 is unprofitable, it seems like the CEO’s pay is fair.
Next Steps:
In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose an executive pay raise. Will this raise take Kao’s pay beyond the bound of reasonableness, or will it help in retaining the talented executive? Being proactive in governance decisions is a key part to investing, and collectively, investors can make a big difference. If you have not done so already, I urge you to complete your research by taking a look at the following: