Alan Hyatt took the reins as CEO of Severn Bancorp Inc’s (NASDAQ:SVBI) and grew market cap to US$86.94M 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. Today we will assess Hyatt’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 Severn Bancorp
Did Hyatt create value?
Profitability of a company is a strong indication of SVBI’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Hyatt’s performance. Most recently, SVBI released an earnings of US$2.54M , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of US$13.83M. Given that SVBI has been loss-making in the past, hopefully a wane in profits isn’t a signal of a reverting trend. During times of falling profits, 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. In the most recent report, Hyatt’s total compensation rose by 8.77% to US$490.25K.
What’s a reasonable CEO compensation?
While there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can estimate a high-level base line to see if SVBI deviates substantially from its peers. This exercise helps investors ask the right question about Hyatt’s incentive alignment. On average, a US small-cap is worth around $1B, generates earnings of $96M, and remunerates its CEO circa $2.7M annually. Accounting for the size of SVBI in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Hyatt is paid in-line with other US CEOs of small-caps, on average. This may mean that SVBI is appropriately compensating its CEO.
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 Hyatt’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. 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 SVBI’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 SVBI? 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.