In This Article:
Chris Drown took the helm as Andromeda Metals Limited’s (ASX:ADN) CEO and grew market cap to AU$7.09M 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 Drown’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. See our latest analysis for Andromeda Metals
What has been the trend in ADN’s earnings?
ADN can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. Over the last year ADN delivered negative earnings of -AU$3.44M . But this is an improvement on prior year’s loss of -AU$6.85M, which may signal a turnaround since ADN has been loss-making for the past five years, on average, with an EPS of -AU$0.017. As profits are moving up and up, CEO pay should echo Drown’s hard work. During this period Drown’s total compensation fell by a substantial rate of -21.75%, to AU$193.49K. Furthermore, Drown’s pay is also made up of non-cash elements, which means that fluctuations in ADN’s share price can move the true level of what the CEO actually collects at the end of the year.
Is ADN overpaying the CEO?
Even though no standard benchmark exists, as remuneration should be tailored to the specific company and market, we can estimate a high-level base line to see if ADN is an outlier. This exercise can help shareholders ask the right question about Drown’s incentive alignment. Generally, an Australian small-cap has a value of $140M, creates earnings of $10M, and pays its CEO circa $500,000 per annum. Typically I would look at market cap and earnings as a proxy for performance, however, ADN’s negative earnings lower the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Drown is remunerated sensibly relative to peers. Overall, though ADN is loss-making, it seems like the CEO’s pay is sound.
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 Drown 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: