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Is Carver Bancorp Inc’s (NASDAQ:CARV) CEO Incentives Align With Yours?

Andrew Carroll

Michael Pugh took the helm as Carver Bancorp Inc’s (NASDAQ:CARV) CEO and grew market cap to US$10.72M 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 Pugh’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 Carver Bancorp

What has been the trend in CARV’s earnings?

Earnings is a powerful indication of CARV’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Pugh’s performance in the past year. In the past year, CARV delivered negative earnings of -US$4.21M , which is a further decline from prior year’s loss of -US$2.93M. Moreover, on average, CARV has been loss-making in the past, with a 5-year average EPS of -US$26.59. During times of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should be reflective of the current state of the business. From the latest report, Pugh’s total remuneration increased by 36.08% to US$367.95K.

NasdaqCM:CARV Income Statement Mar 8th 18
NasdaqCM:CARV Income Statement Mar 8th 18

What’s a reasonable CEO compensation?

Even though one size does not fit all, since compensation should account for specific factors of the company and market, we can determine a high-level thresold to see if CARV is an outlier. This outcome helps investors ask the right question about Pugh’s incentive alignment. On average, a US small-cap has a value of $1B, creates earnings of $96M, and pays its CEO at roughly $2.7M per year. Usually I’d use market cap and profit as factors determining performance, however, CARV’s negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Pugh is being paid within the bounds of reasonableness. Overall, although CARV is unprofitable, it seems like the CEO’s pay is fair.

Next Steps:

My conclusion is that Pugh 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. 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 CARV’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 CARV? 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.