Linda McCurdy took the reins as CEO of K-Bro Linen Inc’s (TSE:KBL) and grew market cap to CA$406.88m recently. 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. I will break down McCurdy’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.
Did McCurdy create value?
Earnings is a powerful indication of KBL’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of McCurdy’s performance in the past year. Most recently, KBL released a profit of CA$5.12m , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of CA$10.25m. However, KBL has strived to sustain a strong track record of generating profits, given its average EPS of CA$1.39 over the past couple of years. During times of diminishing earnings, the company may be incurring a period of reinvestment and growth, or it can be a signal of some headwind. In any case, CEO compensation should be reflective of the current state of the business. In the most recent financial statments, McCurdy’s total compensation grew by 8.12% to CA$1.97m. Furthermore, McCurdy’s pay is also made up of 38.61% non-cash elements, which means that fluxes in KBL’s share price can move the true level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
Despite the fact that there is no cookie-cutter approach, since remuneration should be tailored to the specific company and market, we can estimate a high-level thresold to see if KBL deviates substantially from its peers. This outcome can help shareholders ask the right question about McCurdy’s incentive alignment. Typically, a Canadian small-cap has a value of $345M, generates earnings of $24M, and pays its CEO circa $770,000 annually. Based on KBL’s size and performance, in terms of market cap and earnings, it appears that McCurdy is remunerated higher than the average Canadian small-cap CEO. Although this is only a high-level calculation, investors should be aware of this expense.
What this means for you:
KBL 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 highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about KBL’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 KBL? 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.