Leading BPH Energy Limited (ASX:BPH) as the CEO, David Breeze took the company to a valuation of AU$2.39M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. Today we will assess Breeze’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 BPH Energy

What has been the trend in BPH’s earnings?

BPH 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 BPH produced negative earnings of -AU$3.47M , which is a further decline from prior year’s loss of -AU$568.91K. Furthermore, on average, BPH has been loss-making in the past, with a 5-year average EPS of -AU$0.021. During times of unprofitability the company may be facing a period of reinvestment and growth, or it can be an indication of some headwind. Regardless, CEO compensation should echo the current state of the business. In the most recent report, Breeze’s total remuneration declined by -6.82%, to AU$148.00K.

What’s a reasonable CEO compensation?

Even though one size does not fit all, since remuneration should account for specific factors of the company and market, we can fashion a high-level benchmark to see if BPH is an outlier. This exercise can help shareholders ask the right question about Breeze’s incentive alignment. Generally, an Australian small-cap is worth around $140M, creates earnings of $10M, and remunerates its CEO at roughly $500,000 annually. Typically I’d use market cap and profit as factors determining performance, however, BPH’s negative earnings lower the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Breeze is remunerated sensibly relative to peers. On the whole, even though BPH is unprofitable, it seems like the CEO’s pay is appropriate.

Next Steps:

My conclusion is that Breeze is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. If you have not done so already, I urge you to complete your research by taking a look at the following: