Henry Lam took the helm as Vietnam Industrial Investments Limited’s (ASX:VII) CEO and grew market cap to AU$42.68M 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 Lam’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 Vietnam Industrial Investments
Did Lam 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, VII produced a profit of AU$2.40M , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of AU$8.61M. However, VII has strived to maintain a good track record of profitability, given its average EPS of AU$0.018 over the past couple of years. In the situation of fall in profits, the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should echo the current state of the business. In the most recent financial statments, Lam’s total remuneration increased by 53.82% to AU$808.75K. Although I couldn’t find information on the composition of Lam’s pay, if some portion were non-cash items such as stocks and options, then fluxes in VII’s share price can move the true level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
While there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can determine a high-level base line to see if VII is an outlier. This exercise can help direct shareholders to ask the right question about Lam’s incentive alignment. Typically, an Australian small-cap is worth around $140M, creates earnings of $10M, and pays its CEO at roughly $500,000 per year. Considering the size of VII in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Lam is remunerated above other Australian CEOs of profitable small-caps. Though this is only a high-level estimate, investors should be aware of this expense.
What this means for you:
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in VII, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. If you have not done so already, I highly recommend you to complete your research by taking a look at the following: