Kin Man Kuan took the helm as Vodatel Networks Holdings Limited’s (SEHK:8033) CEO and grew market cap to HK$175.11M 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. Today we will assess Kuan’s pay and compare this to the company’s performance over the same period, as well as measure it against other SEHK-listed CEOs leading companies of similar size and profitability. View our latest analysis for Vodatel Networks Holdings

Did Kuan 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. Recently, 8033 delivered an earnings of HK$15.09M , which is an increase of 266.94% from its prior year’s earnings of HK$4.11M. This is a positive indication that 8033 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 mirror Kuan’s value creation for shareholders. In the same year, Kuan’s total compensation increased by 59.59% to HK$2.17M. Although I couldn’t find information on the composition of Kuan’s pay, if some portion were non-cash items such as stocks and options, then variabilities in 8033’s share price can impact the actual level of what the CEO actually receives.

What’s a reasonable CEO compensation?

Despite the fact that one size does not fit all, since compensation should account for specific factors of the company and market, we can determine a high-level base line to see if 8033 is an outlier. This outcome can help direct shareholders to ask the right question about Kuan’s incentive alignment. Typically, a SEHK small-cap has a value of HK$2.61B, produces earnings of HK$245M, and pays its CEO at roughly HK$3.3M annually. Considering the size of 8033 in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Kuan is paid on a similar level to other SEHK CEOs of small-caps, on average. This may mean that 8033 is appropriately compensating its CEO.

Next Steps:

CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Kuan remunerated appropriately based on other factors we have not covered today? 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 highly recommend you to complete your research by taking a look at the following: