Leading Rosetta Stone Inc (NYSE:RST) as the CEO, John Hass took the company to a valuation of USD$288.55M. 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. I will break down Hass’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 Rosetta Stone
What has been the trend in RST’s earnings?
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, RST released negative earnings of -$9.5M . But this is an improvement on prior year’s loss of -$33.4M, which may signal a turnaround since RST has been loss-making for the past five years, on average, with an EPS of -$1.41. Given earnings are moving the right way, CEO pay should be reflective of Hass’s value creation for shareholders. Over the same period Hass’s total compensation rose by a mere 3.86% to $2,426,701. In addition to this, Hass’s pay is also made up of 2.29% non-cash elements, which means that fluxes in RST’s share price can impact the real level of what the CEO actually collects at the end of the year.
Is RST overpaying the CEO?
Even though one size does not fit all, as remuneration should account for specific factors of the company and market, we can evaluate a high-level yardstick to see if RST is an outlier. This outcome can help direct shareholders to ask the right question about Hass’s incentive alignment. On average, a US small-cap has a value of $1B, generates earnings of $96M, and pays its CEO circa $2.7M per annum. Usually I would look at market cap and earnings as a proxy for performance, however, RST’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Hass is paid aptly compared to those in similar-sized companies. On the whole, though RST is loss-making, it seems like the CEO’s pay is fair.
What this means for you:
Are you a shareholder? You can breathe easy knowing that shareholder funds aren’t being used to overpay RST’s CEO. However, on the flipside, you should ask whether Hass is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. To find out more about RST’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 Hass’s incentives are well-aligned with RST’s shareholders, it is certainly not sufficient to base your investment decision solely on this factor. Whether the company is fundamentally strong depends on RST’s financial health and its future outlook. To research more about these fundamentals, I recommend you check out our simple infographic report on RST’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.