Young-Joon Kim took the reins as CEO of MagnaChip Semiconductor Corporation’s (NYSE:MX) and grew market cap to USD$389.18M 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. Today we will assess Kim’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. Check out our latest analysis for MagnaChip Semiconductor
What has been the trend in MX’s earnings?
Earnings is a powerful indication of MX’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Kim’s performance in the past year. In the past year, MX released negative earnings of -$9M , compared to the previous year’s positive earnings. But on average, MX has been loss-making in the past, with a 5-year average EPS of -$0.43. In the situation of negative earnings, the company may be facing 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 financial report, Kim’s total compensation rose by 9.65% to $1,631,373.
Is MX overpaying the CEO?
Even though there is no cookie-cutter approach, as remuneration should be tailored to the specific company and market, we can gauge a high-level base line to see if MX deviates substantially from its peers. This exercise helps investors ask the right question about Kim’s incentive alignment. Typically, a US small-cap is worth around $1B, generates earnings of $96M, and remunerates its CEO circa $2.7M annually. Normally I’d use market cap and profit as factors determining performance, however, MX’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Kim is remunerated sensibly relative to peers. Overall, though MX is unprofitable, it seems like the CEO’s pay is appropriate.
What this means for you:
Are you a shareholder? In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose an executive pay raise. Will this raise take Kim’s pay beyond the bound of reasonableness, or will it help in retaining the talented executive? Being proactive in governance decisions is a key part to investing, and collectively, investors can make a big difference. To find out more about MX’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? Whether Kim is over or underpaid should not be a deciding factor whether or not you invest in MX. However, the way the company is governed and policies, such as remuneration, are structured, are important considerations for an investor. The best place to start is to understand how well MX is placed financially. To research more about these fundamentals, I recommend you check out our simple infographic report on MX’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.