Michael Bristow took the helm as ARCA biopharma Inc’s (NASDAQ:ABIO) CEO and grew market cap to USD$14.69M 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 Bristow’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. Check out our latest analysis for ARCA biopharma
Did Bristow create value?
Earnings is a powerful indication of ABIO’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Bristow’s performance in the past year. In the past year, ABIO delivered negative earnings of -$19M , which is a further decline from prior year’s loss of -$15M. Furthermore, on average, ABIO has been loss-making in the past, with a 5-year average EPS of -$10.84. During times of unprofitability the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. Regardless, CEO compensation should represent the current condition of the business. In the most recent financial statments, Bristow’s total remuneration grew by 25.06% to $572,256. In addition to this, Bristow’s pay is also made up of 5.77% non-cash elements, which means that fluctuations in ABIO’s share price can move the real level of what the CEO actually receives.
What’s a reasonable CEO compensation?
While one size does not fit all, since compensation should be tailored to the specific company and market, we can evaluate a high-level benchmark to see if ABIO is an outlier. This outcome can help direct shareholders to ask the right question about Bristow’s incentive alignment. On average, a US small-cap is worth around $1B, creates earnings of $96M, and pays its CEO at roughly $2.7M per annum. Typically I’d use market cap and profit as factors determining performance, however, ABIO’s negative earnings reduces the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Bristow is being paid within the bounds of reasonableness. On the whole, although ABIO 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 ABIO’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 ABIO’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in ABIO, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. To research more about these fundamentals, I recommend you check out our simple infographic report on ABIO’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.