Is Empire Resources Limited’s (ASX:ERL) CEO Paid Enough Relative To Peers?
David Sargeant took the helm as Empire Resources Limited’s (ASX:ERL) CEO and grew market cap to AU$8.21M 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 Sargeant’s pay and compare this to the company’s performance over the same period, as well as measure it against other Australian CEOs leading companies of similar size and profitability. Check out our latest analysis for Empire Resources
What has been the trend in ERL’s earnings?
Profitability of a company is a strong indication of ERL’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Sargeant’s performance. In the past year, ERL produced negative earnings of -AU$4.16M , which is a further decline from prior year’s loss of -AU$2.09M. Furthermore, on average, ERL has been loss-making in the past, with a 5-year average EPS of -AU$0.0093. During times of unprofitability the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should mirror the current state of the business. From the latest financial report, Sargeant’s total remuneration fell by more than half of the prior year’s level, to AU$217.80K. Moreover, Sargeant’s pay is also made up of 10.29% non-cash elements, which means that variabilities in ERL’s share price can impact the true level of what the CEO actually receives.
What’s a reasonable CEO compensation?
Though one size does not fit all, as compensation should be tailored to the specific company and market, we can evaluate a high-level base line to see if ERL is an outlier. This outcome can help shareholders ask the right question about Sargeant’s incentive alignment. Generally, an Australian small-cap has a value of $140M, creates earnings of $10M, and pays its CEO at roughly $500,000 annually. Normally I would use earnings and market cap to account for variations in performance, however, ERL’s negative earnings lower the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Sargeant is being paid within the bounds of reasonableness. On the whole, even though ERL is unprofitable, it seems like the CEO’s pay is sound.
Next Steps:
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 Sargeant’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 ERL’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 ERL? 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.
