Leading LM Funding America Inc (NASDAQ:LMFA) as the CEO, Bruce Rodgers took the company to a valuation of $5.21M. 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 Rodgers’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 LM Funding America
What has LMFA’s performance been like?
Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Recently, LMFA released negative earnings of -$6.4M , which is a further decline from prior year’s loss of -$3.5M. Furthermore, on average, LMFA has been loss-making in the past, with a 5-year average EPS of -$0.75. In the situation of unprofitability the company may be going through a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should mirror the current state of the business. In the latest report, Rodgers’s total compensation more than doubled, reaching $374,629 , although off a low base.
What’s a reasonable CEO compensation?
Despite the fact that one size does not fit all, as remuneration should be tailored to the specific company and market, we can evaluate a high-level base line to see if LMFA deviates substantially from its peers. This exercise can help shareholders ask the right question about Rodgers’s incentive alignment. On average, a US small-cap has a value of $1B, produces earnings of $96M, and remunerates its CEO circa $2.7M per year. Normally I would use earnings and market cap to account for variations in performance, however, LMFA’s negative earnings lower the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Rodgers is paid aptly compared to those in similar-sized companies. On the whole, even though LMFA is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.
What this means for you:
Are you a shareholder? Hopefully this article has given you insight on how shareholders should think about LMFA’s governance policies such as CEO pay. As an investor, you have the right to understand how the board thinks about management incentives, and also the right to vote for and against substantial CEO pay changes. Governance is a big factor in investing, and I encourage you to dig deeper into those that represent your voice on the board. To find out more about LMFA’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? Although remuneration can be a useful gauge of whether Rodgers’s incentives are well-aligned with LMFA’s shareholders, it is certainly not sufficient to base your investment decision solely on this factor. Whether the company is fundamentally strong depends on LMFA’s financial health and its future outlook. To research more about these fundamentals, I recommend you check out our simple infographic report on LMFA’s financial metrics.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.