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Is Avalon Holdings Corporation’s (NYSEMKT:AWX) CEO Being Overpaid?

Jason Fuller

Ron Klingle took the reins as CEO of Avalon Holdings Corporation’s (AMEX:AWX) and grew market cap to US$8.41M recently. 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. I will break down Klingle’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. View our latest analysis for Avalon Holdings

Did Klingle 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. Most recently, AWX delivered negative earnings of -US$307.00K , which is a further decline from prior year’s loss of -US$69.00K. Additionally, on average, AWX has been loss-making in the past, with a 5-year average EPS of -US$0.057. During times of unprofitability the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should mirror the current condition of the business. In the most recent financial report, Klingle’s total compensation grew by 9.23% to US$242.00K.

AMEX:AWX Income Statement Mar 23rd 18

What’s a reasonable CEO compensation?

While no standard benchmark exists, as remuneration should be tailored to the specific company and market, we can gauge a high-level yardstick to see if AWX deviates substantially from its peers. This outcome can help shareholders ask the right question about Klingle’s incentive alignment. Normally, a US small-cap is worth around $1B, creates earnings of $96M, and pays its CEO at roughly $2.7M per annum. Typically I would look at market cap and earnings as a proxy for performance, however, AWX’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Klingle is being paid within the bounds of reasonableness. Overall, although AWX is unprofitable, it seems like the CEO’s pay is fair.

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 Klingle 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:

  1. Governance: To find out more about AWX’s governance, look through our infographic report of the company’s board and management.
  2. 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.
  3. Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of AWX? 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.