How Should Investors Feel About Stellar AfricaGold Inc’s (TSXV:SPX) CEO Pay?
John Cumming has been at the helm as CEO of Stellar AfricaGold Inc (TSXV:SPX), which has grown to a market capitalization of CADCA$2.02M. 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 Cumming’s pay and compare this to the company’s performance over the same period, as well as measure it against other Canadian CEOs leading companies of similar size and profitability. Check out our latest analysis for Stellar AfricaGold
Did Cumming create value?
Earnings is a powerful indication of SPX’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Cumming’s performance in the past year. Over the last year SPX delivered negative earnings of -CA$0.9M , which is a further decline from prior year’s loss of -CA$0.3M. Furthermore, on average, SPX has been loss-making in the past, with a 5-year average EPS of -CA$0.03. During times of negative earnings, the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should represent the current state of the business. In the latest financial statments, Cumming’s total remuneration declined by more than half of the prior year’s level, to CA$0.
Is SPX’s CEO overpaid relative to the market?
Despite the fact that no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can fashion a high-level thresold to see if SPX deviates substantially from its peers. This outcome helps investors ask the right question about Cumming’s incentive alignment. Generally, a Canadian small-cap has a value of $345M, creates earnings of $24M, and remunerates its CEO circa $770,000 per annum. Typically I would use earnings and market cap to account for variations in performance, however, SPX’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Cumming is being paid within the bounds of reasonableness. Overall, even though SPX is loss-making, it seems like the CEO’s pay is reflective of the appropriate level.
What this means for you:
Are you a shareholder? CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Is Cumming remunerated appropriately based on other factors we have not covered today? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. To find out more about SPX’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? While CEO compensation is a good indication for how well-aligned the company leader is its investors, it is certainly not enough to simply base your investment decision on this metric. Regardless of whether Cumming’s pay is above or below peers, the more important factors to look at is SPX’s track record of performance and future outlook moving forward. To research more about these fundamentals, I recommend you check out our simple infographic report on SPX’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.
