Todd Stevens took the helm as California Resources Corporation’s (NYSE:CRC) CEO and grew market cap to US$1.65b 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 Stevens’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.
What has CRC’s performance been like?
CRC 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. Recently, CRC delivered negative earnings of -US$355.0m , compared to the previous year’s positive earnings. However, on average, CRC has been loss-making in the past, with a 5-year average EPS of -US$22.03. During times of unprofitability the company may be going through a period of reinvestment and growth, or it can be a signal of some headwind. Regardless, CEO compensation should echo the current state of the business. From the latest report, Stevens’s total remuneration grew by 17.9% to US$4.9m. Moreover, Stevens’s pay is also made up of 49.83% non-cash elements, which means that fluxes in CRC’s share price can move the real level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
Even though no standard benchmark exists, as remuneration should account for specific factors of the company and market, we can determine a high-level yardstick to see if CRC is an outlier. This exercise helps investors ask the right question about Stevens’s incentive alignment. On average, a US small-cap has a value of $1B, generates earnings of $96M, and remunerates its CEO circa $2.7M per annum. Normally I would look at market cap and earnings as a proxy for performance, however, CRC’s negative earnings reduces the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Stevens’s pay outstrips those in comparable companies.
What this means for you:
The next CEO pay bump should be questioned by shareholders at AGM voting. Given that Stevens’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 highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about CRC’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 CRC? 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.