Leading Scott Technology Limited (NZSE:SCT) as the CEO, Chris Hopkins took the company to a valuation of NZ$267.61M. 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 Hopkins’s pay and compare this to the company’s performance over the same period, as well as measure it against other New Zealand CEOs leading companies of similar size and profitability. View our latest analysis for Scott Technology

What has SCT’s performance been like?

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. Over the last year SCT released an earnings of NZ$9.89M , which is an increase of 32.13% from its previous year’s earnings of NZ$7.49M. This is an encouraging signal that SCT aims to sustain a strong track record of generating profits regardless of the challenges. Since earnings are heading towards the right direction, CEO pay should echo Hopkins’s value creation for shareholders. During this period Hopkins’s total compensation rose by 22.17% to NZ$992.00K. Although I couldn’t find information on the composition of Hopkins’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in SCT’s share price can move the real level of what the CEO actually takes home at the end of the day.

What’s a reasonable CEO compensation?

While there is no cookie-cutter approach, as remuneration should account for specific factors of the company and market, we can determine a high-level base line to see if SCT is an outlier. This outcome helps investors ask the right question about Hopkins’s incentive alignment. Generally, a NZ small-cap has a value of $190M, produces earnings of $18M, and remunerates its CEO circa $480,000 per annum. Taking into account the size of SCT in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Hopkins is paid more than other NZ CEOs of profitable small-caps. Though this is merely a high-level calculation, shareholders should be cognizant of this expense.

What this means for you:

The next CEO pay bump should be questioned by shareholders at AGM voting. Given that Hopkins’s pay is already above the bracket of other CEOs of similar companies, what justifies a further increase? Although CEO pay is not the be all and end all, it serves as a signal as to whether the board’s and management’s incentives are aligned with the rest of the shareholders. If you have not done so already, I urge you to complete your research by taking a look at the following: