Leading Varonis Systems Inc (NASDAQ:VRNS) as the CEO, Yaki Faitelson took the company to a valuation of $1.43B. 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. Today we will assess Faitelson’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 Varonis Systems
Did Faitelson create value?
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. Most recently, VRNS produced negative earnings of -$15.7M . But this is an improvement on prior year’s loss of -$18.6M, which may signal a turnaround since VRNS has been loss-making for the past five years, on average, with an EPS of -$1.07. Given earnings are moving the right way, CEO pay should represent Faitelson’s hard work. In the same year, Faitelson’s total compensation dropped by a significant rate of -36.52%, to $1,334,106. In addition to this, Faitelson’s pay is also made up of 5.63% non-cash elements, which means that fluctuations in VRNS’s share price can affect the actual level of what the CEO actually receives.
Is VRNS overpaying the CEO?
Despite the fact that no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can fashion a high-level base line to see if VRNS deviates substantially from its peers. This exercise can help shareholders ask the right question about Faitelson’s incentive alignment. On average, a US small-cap has a value of $1B, produces earnings of $96M, and remunerates its CEO circa $2.7M per year. Typically I would look at market cap and earnings as a proxy for performance, however, VRNS’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Faitelson is being paid within the bounds of reasonableness. Putting everything together, though VRNS is loss-making, it seems like the CEO’s pay is reflective of the appropriate level.
What this means for you:
Are you a shareholder? You can breathe easy knowing that shareholder funds aren’t being used to overpay VRNS’s CEO. However, on the flipside, you should ask whether Faitelson 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 VRNS’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 VRNS, 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 VRNS’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.