Keith Cochrane has been at the helm as CEO of Carillion plc (LSE:CLLN), which has grown to a market capitalization of GBP£82.80M. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Cochrane’s pay and compare this to the company’s performance over the same period, as well as measure it against other UK CEOs leading companies of similar size and profitability. View our latest analysis for Carillion
What has been the trend in CLLN’s earnings?
CLLN 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. Most recently, CLLN produced negative earnings of -£1,067M , compared to the previous year’s positive earnings. Additionally, CLLN hasn’t always been loss-making, with an average EPS of £0.15 over the past five years. During times of unprofitability the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should emulate the current state of the business. In the latest report, Cochrane’s total remuneration more than doubled, reaching £61,000 , although off a low base. Although I couldn’t find information on the composition of Cochrane’s pay, if some portion were non-cash items such as stocks and options, then fluxes in CLLN’s share price can move the real level of what the CEO actually receives.
Is CLLN overpaying the CEO?
Though no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can evaluate a high-level thresold to see if CLLN is an outlier. This outcome can help shareholders ask the right question about Cochrane’s incentive alignment. On average, a UK small-cap has a value of £696M, generates earnings of £67M, and remunerates its CEO at roughly £1M per annum. Typically I would look at market cap and earnings as a proxy for performance, however, CLLN’s negative earnings lower the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Cochrane is paid aptly compared to those in similar-sized companies. On the whole, even though CLLN is unprofitable, it seems like the CEO’s pay is sound.
What this means for you:
Are you a shareholder? Hopefully this article has given you insight on how shareholders should think about CLLN’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. To find out more about CLLN’s governance, look through our infographic report of the company’s board and management.