Ernest Garcia is the CEO of Carvana Co (NYSE:CVNA), which has recently grown to a market capitalization of $2.52B. 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. Today we will assess Garcia’s pay and compare this to the company’s performance over the same period, as well as measure it against other US CEOs leading companies of similar size and profitability. See our latest analysis for Carvana
What has CVNA’s performance been like?
Earnings is a powerful indication of CVNA’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Garcia’s performance in the past year. In the past year, CVNA produced negative earnings of -$120.3M , which is a further decline from prior year’s loss of -$22.8M. Furthermore, on average, CVNA has been loss-making in the past, with a 5-year average EPS of -$2.63. In the situation of unprofitability the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any event, CEO compensation should emulate the current condition of the business. In the most recent financial statments, Garcia’s total remuneration fell by -10.97%, to $454,008.
What’s a reasonable CEO compensation?
Despite the fact that one size does not fit all, as remuneration should be tailored to the specific company and market, we can evaluate a high-level yardstick to see if CVNA deviates substantially from its peers. This exercise can help direct shareholders to ask the right question about Garcia’s incentive alignment. Generally, a US mid-cap has a value of $5B, creates earnings of $290M and remunerates its CEO at roughly $5.3M per annum. Normally I would use earnings and market cap to account for variations in performance, however, CVNA’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for Garcia is remunerated sensibly relative to peers. On the whole, even though CVNA is loss-making, it seems like the CEO’s pay is fair.
Next Steps:
You can breathe easy knowing that shareholder funds aren’t being used to overpay CVNA’s CEO. However, on the flipside, you should ask whether Garcia is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. If you have not done so already, I urge you to complete your research by taking a look at the following: