David Horgan took the reins as CEO of Petrel Resources Plc’s (AIM:PET) and grew market cap to GBP£1.74M 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. Today we will assess Horgan’s pay and compare this to the company’s performance over the same period, as well as measure it against other UK CEOs leading companies of similar size and profitability. See our latest analysis for PET
Did Horgan create value?
Profitability of a company is a strong indication of PET’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Horgan’s performance. Most recently, PET produced negative earnings of -€0.4M , which is a further decline from prior year’s loss of -€0.2M. Furthermore, on average, PET has been loss-making in the past, with a 5-year average EPS of -€0.01. During times of unprofitability the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. Regardless, CEO compensation should be reflective of the current condition of the business. From the latest financial report, Horgan’s total compensation remained stable at €30,000 since the previous year. Although I couldn’t find information on the breakdown of Horgan’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in PET’s share price can affect the real level of what the CEO actually receives.
Is PET’s CEO overpaid relative to the market?
While there is no cookie-cutter approach, as remuneration should account for specific factors of the company and market, we can estimate a high-level thresold to see if PET deviates substantially from its peers. This outcome can help shareholders ask the right question about Horgan’s incentive alignment. Typically, a UK small-cap is worth around £696M, creates earnings of £67M, and remunerates its CEO at roughly £1M per year. Usually I’d use market cap and profit as factors determining performance, however, PET’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Horgan is paid aptly compared to those in similar-sized companies. Putting everything together, even though PET is loss-making, it seems like the CEO’s pay is appropriate.
What this means for you:
Are you a shareholder? Hopefully this article has given you insight on how shareholders should think about PET’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 PET’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? While CEO compensation is a good indication for how well-aligned the company leader is its investors, it is certainly not enough to simply base your investment decision on this metric. Regardless of whether Horgan’s pay is above or below peers, the more important factors to look at is PET’s track record of performance and future outlook moving forward. To research more about these fundamentals, I recommend you check out our simple infographic report on PET’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.