Leading Legacy Reserves LP (NASDAQ:LGCY) as the CEO, Paul Horne took the company to a valuation of US$361.40M. 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 Horne’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 Legacy Reserves
What has LGCY’s performance been like?
Earnings is a powerful indication of LGCY’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Horne’s performance in the past year. Most recently, LGCY delivered negative earnings of -US$72.90M . But this is an improvement on prior year’s loss of -US$74.82M, which may signal a turnaround since LGCY has been loss-making for the past five years, on average, with an EPS of -US$2.08. Given earnings are moving the right way, CEO pay should represent Horne’s hard work. Over the same period Horne’s total compensation grew by 70.38% to US$3.55M. In addition to this, Horne’s pay is also made up of 6.43% non-cash elements, which means that variabilities in LGCY’s share price can affect the true level of what the CEO actually takes home at the end of the day.
Is LGCY overpaying the CEO?
Though one size does not fit all, since remuneration should account for specific factors of the company and market, we can estimate a high-level thresold to see if LGCY is an outlier. This outcome can help shareholders ask the right question about Horne’s incentive alignment. Typically, a US small-cap has a value of $1B, creates earnings of $96M, and remunerates its CEO circa $2.7M per annum. Usually I’d use market cap and profit as factors determining performance, however, LGCY’s negative earnings lower the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Horne’s pay is above other similar companies.
What this means for you:
Whether Horne is over or underpaid should not be a deciding factor whether or not you invest in LGCY. However, the way the company is governed and policies, such as remuneration, are structured, are important considerations for an investor. The best place to start is to understand how well LGCY is placed financially. 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 LGCY’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 LGCY? 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.