Xiao Ping Zhang took the helm as SORL Auto Parts Inc’s (NASDAQ:SORL) CEO and grew market cap to $138.22M 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 Zhang’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 SORL Auto Parts
What has SORL’s performance been like?
Earnings is a powerful indication of SORL’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Zhang’s performance in the past year. Recently, SORL produced an earnings of $29.7M , which is an increase of 76.46% from its prior year’s earnings of $16.9M. This is a positive indication that SORL has strived to maintain a good track record of profitability in the face of any headwinds. Given earnings are moving the right way, CEO pay should echo Zhang’s valued-adding activities. During this period Zhang’s total compensation remained stable at $60,000 since the previous year.
Is SORL’s CEO overpaid relative to the market?
While one size does not fit all, since compensation should account for specific factors of the company and market, we can gauge a high-level benchmark to see if SORL is an outlier. This outcome can help shareholders ask the right question about Zhang’s incentive alignment. On average, a US small-cap has a value of $1B, generates earnings of $96M, and remunerates its CEO circa $2.7M annually. Considering SORL’s size and performance, in terms of market cap and earnings, it seems that Zhang is paid lower than other similar US CEOs in the small-cap industry.
What this means for you:
Are you a shareholder? My conclusion is that Zhang 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. To find out more about SORL’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 SORL, 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 SORL’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.