Gary Stern has been at the helm as CEO of Asta Funding Inc (NASDAQ:ASFI), which has grown to a market capitalization of USD$51.00M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Stern’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 Asta Funding
What has been the trend in ASFI’s earnings?
ASFI 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, ASFI released negative earnings of -$0.7M , compared to the previous year’s positive earnings. Furthermore, ASFI hasn’t always been loss-making, with an average EPS of $0.36 over the past five years. In the situation of unprofitability the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. In any event, CEO compensation should represent the current condition of the business. From the latest financial report, Stern’s total compensation increased by a mere 0.55% to $675,488. Moreover, Stern’s pay is also comprised of non-cash items, which means that variabilities in ASFI’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?
Though there is no cookie-cutter approach, as remuneration should be tailored to the specific company and market, we can estimate a high-level base line to see if ASFI is an outlier. This outcome can help shareholders ask the right question about Stern’s incentive alignment. Generally, a US small-cap is worth around $1B, creates earnings of $96M, and pays its CEO at roughly $2.7M annually. Normally I’d use market cap and profit as factors determining performance, however, ASFI’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Stern is being paid within the bounds of reasonableness. On the whole, though ASFI is unprofitable, it seems like the CEO’s pay is appropriate.
What this means for you:
Are you a shareholder? My conclusion is that Stern is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. To find out more about ASFI’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in ASFI, 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. To research more about these fundamentals, I recommend you check out our simple infographic report on ASFI’s financial metrics.
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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.