Leading American Lorain Corporation (AMEX:ALN) as the CEO, Si Chen took the company to a valuation of US$11.47M. 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 Chen’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 American Lorain
What has been the trend in ALN’s earnings?
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, ALN produced negative earnings of -US$23.71M . However, this is an improvement on prior year’s loss of -US$92.17M, which may signal a turnaround since ALN has been loss-making for the past five years, on average, with an EPS of -US$0.08. Since earnings are heading towards the right direction, CEO pay should mirror Chen’s value creation for shareholders. In the same year, Chen’s total remuneration remained stable at US$66.00K since the previous year.
What’s a reasonable CEO compensation?
While no standard benchmark exists, as remuneration should account for specific factors of the company and market, we can fashion a high-level thresold to see if ALN deviates substantially from its peers. This exercise can help shareholders ask the right question about Chen’s incentive alignment. Normally, a US small-cap is worth around $1B, generates earnings of $96M, and remunerates its CEO at roughly $2.7M annually. Normally I would look at market cap and earnings as a proxy for performance, however, ALN’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Chen is paid aptly compared to those in similar-sized companies. Overall, although ALN is unprofitable, it seems like the CEO’s pay is sound.
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in ALN, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about ALN’s governance, look through our infographic report of the company’s board and management.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of ALN? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.