Shenping Yin took the reins as CEO of Recon Technology Ltd’s (NASDAQ:RCON) and grew market cap to $15.32M recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Yin’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 Recon Technology
What has RCON’s performance been like?
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, RCON produced negative earnings of -CN¥32.7M . However, this is an improvement on prior year’s loss of -CN¥37.5M, which may signal a turnaround since RCON has been loss-making for the past five years, on average, with an EPS of -CN¥3.5. Since earnings are heading towards the right direction, CEO pay should represent Yin’s hard work. During this period Yin’s total compensation increased over two-fold, to CN¥2,357,437 .
Is RCON overpaying the CEO?
While one size does not fit all, since remuneration should be tailored to the specific company and market, we can determine a high-level yardstick to see if RCON is an outlier. This exercise can help direct shareholders to ask the right question about Yin’s incentive alignment. On average, a US small-cap is worth around $1B, creates earnings of $96M, and remunerates its CEO at roughly $2.7M per year. Typically I’d use market cap and profit as factors determining performance, however, RCON’s negative earnings lower the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Yin is being paid within the bounds of reasonableness. Putting everything together, although RCON is loss-making, it seems like the CEO’s pay is sound.
What this means for you:
Are you a shareholder? You can breathe easy knowing that shareholder funds aren’t being used to overpay RCON’s CEO. However, on the flipside, you should ask whether Yin is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. To find out more about RCON’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? In order to determine whether or not you should invest in RCON, your thesis should be built on fundamentals. Even though CEO pay isn’t technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how RCON makes money, and factors impacting your return on investment. To research more about these fundamentals, I recommend you check out our simple infographic report on RCON’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.