Is Kadant Inc’s (NYSE:KAI) CEO Being Overpaid?
Jon Painter took the reins as CEO of Kadant Inc’s (NYSE:KAI) and grew market cap to US$1.09b 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 Painter’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 Kadant
What has been the trend in KAI’s earnings?
KAI can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. Most recently, KAI released an earnings of US$37.25m , which is an increase of 9.77% from its previous year’s earnings of US$33.94m. This is a positive indication that KAI has strived to maintain a good track record of profitability in the face of any headwinds. As profits are moving up and up, CEO pay should mirror Painter’s valued-adding activities. During this period Painter’s total compensation declined by a trivial -0.008%, to US$4.54m. Moreover, Painter’s pay is also made up of 0.55% non-cash elements, which means that fluctuations in KAI’s share price can move the actual level of what the CEO actually takes home at the end of the day.
Is KAI overpaying the CEO?
Though there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can gauge a high-level benchmark to see if KAI deviates substantially from its peers. This outcome helps investors ask the right question about Painter’s incentive alignment. Normally, a US small-cap has a value of $1B, generates earnings of $96M, and remunerates its CEO at roughly $2.7M per annum. Accounting for KAI’s size and performance, in terms of market cap and earnings, it appears that Painter is remunerated above other US CEOs of small-caps, on average. Even though this is merely a rudimentary calculation, shareholders should be cognizant of this expense.
What this means for you:
The next CEO pay bump should be questioned by shareholders at AGM voting. Given that Painter’s pay is already above the bracket of other CEOs of similar companies, what justifies a further increase? Although CEO pay is not the be all and end all, it serves as a signal as to whether the board’s and management’s incentives are aligned with the rest of the shareholders. If you have not done so already, I urge you to complete your research by taking a look at the following:
Governance: To find out more about KAI’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 KAI? 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 editorial-team@simplywallst.com.
