Is Intercept Pharmaceuticals Inc’s (NASDAQ:ICPT) CEO Incentives Align With Yours?
Leading Intercept Pharmaceuticals Inc (NASDAQ:ICPT) as the CEO, Mark Pruzanski took the company to a valuation of US$1.37B. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. I will break down Pruzanski’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 Intercept Pharmaceuticals
Did Pruzanski create value?
Profitability of a company is a strong indication of ICPT’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Pruzanski’s performance. Most recently, ICPT delivered negative earnings of -US$369.14M . However, this is an improvement on prior year’s loss of -US$381.04M, which may signal a turnaround since ICPT has been loss-making for the past five years, on average, with an EPS of -US$9.79. Given earnings are moving the right way, CEO pay should echo Pruzanski’s value creation for shareholders. In the same year, Pruzanski’s total remuneration fell by a significant rate of -20.73%, to US$4.85M. In addition to this, Pruzanski’s pay is also made up of 6.58% non-cash elements, which means that fluctuations in ICPT’s share price can affect the true level of what the CEO actually receives.
Is ICPT’s CEO overpaid relative to the market?
Even though one size does not fit all, since remuneration should account for specific factors of the company and market, we can determine a high-level base line to see if ICPT deviates substantially from its peers. This outcome can help shareholders ask the right question about Pruzanski’s incentive alignment. Typically, a US small-cap has a value of $1B, produces earnings of $96M, and pays its CEO at roughly $2.7M per year. Typically I’d use market cap and profit as factors determining performance, however, ICPT’s negative earnings lower the usefulness of my formula. Given the range of pay for small-cap executives, it seems like Pruzanski’s pay outstrips those in comparable companies.
What this means for you:
ICPT may be paying its CEO above-market rates due to many reasons – retention, reward, or inflated non-cash components of total pay. However, shareholders also should be aware of what the appropriate level is. Boards should be transparent with how they structure CEO pay given that there should be nothing to hide in public companies. Hopefully this analysis has given you the basis for questioning the next CEO pay raise. If you have not done so already, I urge you to complete your research by taking a look at the following:
1. Governance: To find out more about ICPT’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 ICPT? 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.
