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William Johnson took the helm as Strike Resources Limited’s (ASX:SRK) CEO and grew market cap to AU$7.99M recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Johnson’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 Strike Resources
Did Johnson create value?
Earnings is a powerful indication of SRK’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Johnson’s performance in the past year. Over the last year SRK produced negative earnings of -AU$1.00M , which is a further decline from prior year’s loss of -AU$503.02K. Additionally, on average, SRK has been loss-making in the past, with a 5-year average EPS of -AU$0.055. During times of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should mirror the current condition of the business. In the latest financial report, Johnson’s total compensation declined by more than half of the prior year’s level, to AU$221.63K.
Is SRK overpaying the CEO?
Though 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 SRK deviates substantially from its peers. This exercise helps investors ask the right question about Johnson’s incentive alignment. Typically, an Australian small-cap has a value of $140M, produces earnings of $10M, and pays its CEO at roughly $500,000 per annum. Normally I’d use market cap and profit as factors determining performance, however, SRK’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Johnson is being paid within the bounds of reasonableness. Overall, although SRK is unprofitable, it seems like the CEO’s pay is fair.
Next Steps:
Hopefully this article has given you insight on how shareholders should think about SRK’s governance policies such as CEO pay. As an investor, you have the right to understand how the board thinks about management incentives, and also the right to vote for and against substantial CEO pay changes. Governance is a big factor in investing, and I encourage you to dig deeper into those that represent your voice on the board. If you have not done so already, I highly recommend you to complete your research by taking a look at the following: