Dan O’Brien took the reins as CEO of Flexible Solutions International Inc’s (NYSEMKT:FSI) and grew market cap to US$18.03m recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. I will break down O’Brien’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.
What has been the trend in FSI’s earnings?
Profitability of a company is a strong indication of FSI’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for O’Brien’s performance. Most recently, FSI delivered negative earnings of -US$794.26k , compared to the previous year’s positive earnings. Furthermore, FSI hasn’t always been loss-making, with an average EPS of US$0.086 over the past five years. During times of unprofitability the company may be facing a period of reinvestment and growth, or it can be a signal of some headwind. In any case, CEO compensation should represent the current state of the business. In the latest report, O’Brien’s total compensation rose by 21.34% to US$901.61k.
Is FSI’s CEO overpaid relative to the market?
While one size does not fit all, since compensation should be tailored to the specific company and market, we can gauge a high-level benchmark to see if FSI deviates substantially from its peers. This outcome helps investors ask the right question about O’Brien’s incentive alignment. On average, a US small-cap has a value of $1B, generates earnings of $96M, and pays its CEO at roughly $2.7M annually. Usually I would look at market cap and earnings as a proxy for performance, however, FSI’s negative earnings lower the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like O’Brien is being paid within the bounds of reasonableness. Putting everything together, although FSI is loss-making, it seems like the CEO’s pay is reflective of the appropriate level.
My conclusion is that O’Brien is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. 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 FSI’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 FSI? 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 email@example.com.