Leading Oracle Corporation (NYSE:ORCL) as the CEO, Safra Catz took the company to a valuation of US$192.01b. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. Today we will assess Catz’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 ORCL’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. Over the last year ORCL delivered a profit of US$3.83b , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of US$9.34b. However, ORCL has strived to sustain a strong track record of generating profits, given its average EPS of US$2.11 over the past couple of years. In the situation of fall in profits, the company may be going through a period of reinvestment and growth, or it can be a signal of some headwind. In any case, CEO compensation should echo the current state of the business. From the latest report, Catz’s total compensation declined by a trivial -0.52%, to US$40.73m. Furthermore, Catz’s pay is also made up of non-cash items, which means that fluxes in ORCL’s share price can affect the true level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Though no standard benchmark exists, as compensation should be tailored to the specific company and market, we can fashion a high-level base line to see if ORCL is an outlier. This exercise helps investors ask the right question about Catz’s incentive alignment. Normally, a US large-cap has a value of $64.9B, creates earnings of $3.6B and remunerates its CEO circa $12.2M annually. Considering ORCL’s size and performance, in terms of market cap and earnings, it appears that Catz is paid higher than other US CEOs of profitable large-caps. Although this is merely a basic estimate, investors should be cognizant of this expense.
What this means for you:
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in ORCL, 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. 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 ORCL’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 ORCL? 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 firstname.lastname@example.org.