Peter Mitchell took the helm as 3D Resources Limited’s (ASX:DDD) CEO and grew market cap to AU$4.94M 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. I will break down Mitchell’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. Check out our latest analysis for 3D Resources
Did Mitchell 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, DDD released negative earnings of -AU$1.51M , compared to the previous year’s positive earnings. But on average, DDD has been loss-making in the past, with a 5-year average EPS of -AU$0.0014. 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 be reflective of the current state of the business. In the most recent financial report, Mitchell’s total compensation declined by -20.00%, to AU$72.00K.
What’s a reasonable CEO compensation?
Though no standard benchmark exists, as remuneration should account for specific factors of the company and market, we can evaluate a high-level yardstick to see if DDD is an outlier. This exercise can help direct shareholders to ask the right question about Mitchell’s incentive alignment. Typically, an Australian small-cap has a value of $140M, produces earnings of $10M, and remunerates its CEO at roughly $500,000 per annum. Typically I would use earnings and market cap to account for variations in performance, however, DDD’s negative earnings lower the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Mitchell is paid aptly compared to those in similar-sized companies. On the whole, although DDD is unprofitable, it seems like the CEO’s pay is appropriate.
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 Mitchell 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: